Assessment of flexibility options in capacity mechanisms

Derating factors make the contribution of different technologies to security of supply comparable by converting a technology’s nominal capacity into equivalent firm capacity. Using battery storage as an example, a new EWI analysis shows that energy-limited flexibility options reduce the need for residual firm capacity for a given security-of-supply target. As market penetration increases, however, this reducing effect diminishes because the period over which batteries must distribute their limited energy to further reduce the need for residual firm capacity lengthens. Accordingly, battery derating factors decline as market penetration increases.

In the analysis “Assessment of energy-limited flexibility options in capacity mechanisms,” experts at the Institute of Energy Economics (EWI) at the University of Cologne describe and compare four approaches for determining derating factors. The different approaches are quantified using a stylized electricity market model and related to the calculation of derating factors in the Belgian and British capacity markets. The analysis was financed by the “Integrated Electricity Market Design” funding initiative of the Society of Benefactors of the Institute of Energy Economics (EWI) at the University of Cologne e.V..

Four approaches to determining derating factors

The four considered approaches differ in how derating factors are defined: The first definition refers to the substitution ratio between a technology’s nominal capacity and a hypothetical, perfectly available “firm capacity” while keeping the level of security of supply unchanged. The second definition refers to a technology’s power contribution in scarcity situations relative to its nominal capacity. Both definitions can be applied either to a marginal (additional) unit or to the average across the entire technology stock. The average substitution ratio yields significantly higher derating factors than the nearly identical factors resulting from the other approaches. However, the derived power contributions are strongly influenced by the definition of scarcity situations.

Derating factors and their significance for capacity mechanisms

Derating factors are relevant for the efficiency and effectiveness of a capacity mechanism because they influence both the technology mix and the total contracted nominal capacity. Overestimating derating factors can jeopardize security of supply, while underestimating them can lead to unnecessarily high costs. Beyond the stylized electricity market modeling, the analysis discusses how imperfect foresight, ancillary services, and network constraints can affect derating factors and identifies further research needs regarding the application of derating factors in capacity auctions as well as the transferability of the presented approaches to demand-side flexibility options.