Expanding renewables and the challenge of designing market payments

Under higher levels of variability, conventional generating units are required to operate over a broader range of outputs and to startup and shutdown more frequently. Thus, when new units with limited operational flexibility are introduced, they will tend to impose costs on the rest of the generating units. Therefore the value of a generation resource to a system is not only a function of its own costs, but also increasingly the extent to which it imposes costs on other units. Future market incentive structures should therefore not specifically target the generating units with the lowest costs, but rather those units that result in the lowest overall costs for the whole system. As an example, this paper investigates the degree to which profit-maximizing investments under an energy-only, opportunity-cost bidding market structure, depart from the cost-minimizing, socially-optimal investment trajectory, under increasing levels of wind power.