A market-based approach to assessing the capacity value of variable renewable energy: Evidence from the Dominican Republic

Abstract

The growing integration of variable renewable energy (VRE) challenges traditional capacity valuation methods in electricity markets, which mainly rely on probabilistic models and technical adequacy metrics and are not linked to market design and economic incentives. This study introduces a new approach to assessing the Economic Capacity Value (ECV) of VRE resources, which measures their contribution to system reliability, considering resource availability and market conditions. The methodology is applied using a co-optimization model of the energy market and the capacity remuneration mechanism that minimizes total system costs and capacity payments. The framework is applied to the Dominican Republic's electricity market, using 2023 demand and generation data. Results show that VRE resources provide a significant contribution to system reliability under existing market conditions. Solar photovoltaic ECVs range from 21.8 MW (17.2%) in the north region to 107.2 MW (33.6%) in the southwest, while wind power exhibits higher values, reaching 87.6 MW (43.9%) in the north and 74.7 MW (34.4%) in the southwest. In all cases, ECV surpasses the capacity factor, indicating that VRE contributes more to reliability than its average production suggests. Sensitivity analysis shows that ECV is highly sensitive to market design parameters, with ±25% variations in capacity payments or scarcity prices resulting in ECV changes of up to 34%. These findings show that capacity value can be influenced by both resource availability during high demand periods and market design, supporting the inclusion of VRE in capacity remuneration mechanisms based on ECV.