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The Impact of Uncertainty on the Need and Design of Capacity Remuneration Mechanisms in Low-Carbon Power Systems

Fernando J. de Sisternes and John E. Parsons

February 2016

The case for or against capacity remuneration mechanisms (CRMs) is often made in a simple framework that takes the structure of the electric power system as a given and does not substantively consider uncertainty. This paper highlights the central role that uncertainty around the net load profile and net load growth plays in the case for a CRM and in determining its optimal design. Using a stylized example, the paper shows that uncertainty increases the risks investors take financing new generation so that a higher likelihood of near term profits is required. Existing alternative designs of CRMs have differing implications for how society can provide an efficient and effective signal about its demand for security of supply under uncertainty. In addition, different CRMs each present limitations in their ability to incorporate appropriate CRM design principles, which are also emphasized.

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