Crediting Variable Renewable Energy and Energy Storage in Capacity Markets: Effects of Unit Commitment and Storage Operation

As more variable renewable energy (VRE) and energy storage (ES) facilities are installed, accurate quantification of their contributions to system adequacy becomes crucial. We propose a definition of capacity credit (CC) for valuing adequacy contributions of these resources based on their marginal capability to reduce expected unserved energy. We show that such marginal credits can incentivize system-optimal investments in markets with installed capacity requirements and energy price caps. We simulated such markets using a LP-based capacity expansion planning model with convexified unit commitment (UC) constraints and ES. The impacts of UC and ES on capacity credits are investigated. Furthermore, we analyze technology and system cost distortions resulting from implementing inaccurate CCs in the capacity market. The results show that ignoring UC constraints can overestimate the CCs for VRE and ES. Building ES increases the CCs of VRE resources with higher capacity factors and a negative correlation with load. Assigning the wrong credit to VRE can significantly distort resource mixes and system cost. Implementing the proposed CCs can, in theory, eliminate those distortions and achieve the same overall optimum as a theoretical market without energy price caps.