Determination of appropriate price level in installed capacity market

As one of the most important approaches for ensuring adequate generation capacity and hence the reliability of electricity supply, the installed capacity obligation mechanism is employed in some operating electricity markets by imposing such an obligation on all load serving entities (LSEs). To facilitate the enforcement of the obligation, an installed capacity market is established for the LSEs and generation companies to trade installed capacity. In this paper, the optimal allocation strategies of generation capacity for generation companies between two electricity markets under different levels of installed capacity prices as well as the optimal purchasing strategies of LSEs are first examined, and on this basis a new framework is developed to determine an appropriate level of generation installed capacity price for ensuring generation capacity adequacy. Finally, the proposed method is illustrated by a numerical example.