Market Mechanisms for Low-Carbon Electricity Investments: A Game-Theoretical Analysis

TL;DR

This paper proposes a game-theoretical market mechanism with penalties and incentives to promote low-carbon energy investments, reduce consumer costs, and align market outcomes with social optimality in electricity markets transitioning to renewables.

Contribution

It introduces a novel PIU market mechanism that aligns investor incentives with social welfare and mitigates excessive scarcity prices, supported by a game-theoretical analysis.

Findings

The PIU mechanism can reach the social optimum under certain conditions.

It reduces consumer costs by over 30% compared to traditional marginal-cost pricing.

The system cost deviation decreases as more conventional energy resources retire.

Abstract

Electricity markets are transforming from the dominance of conventional energy resources (CERs), e.g., fossil fuels, to low-carbon energy resources (LERs), e.g., renewables and energy storage. This work examines market mechanisms to incentivize LER investments, while ensuring adequate market revenues for investors, guiding investors' strategic investments towards social optimum, and protecting consumers from scarcity prices. To reduce the impact of excessive scarcity prices, we present a new market mechanism, which consists of a Penalty payment for lost load, a supply Incentive, and an energy price Uplift (PIU). We establish a game-theoretical framework to analyze market equilibrium. We prove that one Nash equilibrium under the penalty payment and supply incentive can reach the social optimum given quadratic supply costs of CERs. Although the price uplift can ensure adequate revenues, the resulting system cost deviates from the social optimum while the gap decreases as more CERs retire. Furthermore, under the traditional marginal-cost pricing (MCP) mechanism, investors may withhold investments to cause scarcity prices, but such behavior is absent under the PIU mechanism. Simulation results show that the PIU mechanism can reduce consumers' costs by over 30% compared with the MCP mechanism by reducing excessive revenues of low-cost CERs from scarcity prices.