Capacity payments in competitive electricity markets - a bilateral trade model

A bilateral trade model for capacity payments is presented in this paper. The procedure is based on an organized market where IPP (independent power producer) and LSEs (load serving entities) or large customers can trade the capacity just like energy. So both the price and allocation among the different plants and LSEs are determined through competitive mechanisms. This results in the stabilization of the income of the generators and provides a clear incentive for new generation investment. It also shows how much capacity the customers need in the future and how much they are willing to pay. Additionally, the relationship between energy market and the capacity payments also can be used to mitigate the highly volatile spot price. The proposed model has been tested with a study case and some computation results have been demonstrated. Nash equilibrium game is used to compare the abuse of market power in two type of capacity market.