Is a Capacity Remuneration Mechanism Worth the Cost? A Case Study of Finland

Abstract

This case study analyzes the costs and profitability of a capacity remuneration mechanism in Finland. The capacity remuneration mechanism provides an annual capacity payment to owners for maintaining sufficient capacity to address scarcity events. Two approaches are used: a linear model, linking the annual payment to electricity prices, and a stochastic model, incorporating uncertainties via Monte Carlo simulation. The capacity payments are approximately €68000/MW/year for a gas turbine, and €110000/MW/year for a CCGT regardless of the model used. Considering the total capacity required to cover all scarcity events in Finland, the annual cost is estimated at €51–150 million for a gas turbine, and €73–261 million for a CCGT, corresponding to an additional electricity cost of €0.62– 3.19 per each MWh consumed in Finland. By comparison, the annual value of lost load is clearly lower, at around €31.6 million per year.