How to correct long-term system externality of large scale windpower development by a capacity mechanism?

This paper deals with the practical problems related to long-term security of supply in electricity markets in the presence of large-scale wind power development. The success of renewable promotion schemes adds a new dimension to ensuring long-term security of supply. It necessitates designing second-best policies to prevent large-scale wind power development from distorting long-run equilibrium prices and investments in conventional generation and in particular in peaking units. We rely upon a long-term simulation model which simulates electricity market players’ investment decisions in a market regime and incorporates large-scale wind power development either in the presence of either subsidised wind production or in market-driven development. We test the use of capacity mechanisms to compensate for the long-term effects of large-scale wind power development on the system reliability. The first finding is that capacity mechanisms can help to reduce the social cost of large scale wind power development in terms of decrease of loss of load probability. The second finding is that, in a market-based wind power deployment without subsidy, wind generators are penalized for insufficient contribution to the long term system’s reliability.