Following the development of decentralized production technologies, energy communities have become a topic of increased interest. While the potential benefits have been described, we use the framework of cooperative game theory to test the ability of such communities to adequately share the gains. Indeed, despite the potential value created by such coalitions, there is no guarantee that they will be viable: a subset of participants may find it profitable to exit the community and create another one of their own. We take the case of a neighborhood, having access to a limited resource e.g. a shared roof or piece of land which they can exploit if they invest in some renewable production capacity. By joining the community, participants also enjoy aggregation gains in the form of reduced network fees. We find conditions depending on the structure of renewable installation costs, on the magnitude of the aggregation effect and coordination costs and, most importantly, on the chosen sharing rule, under which the whole energy community is stable. Efficiency could require the intervention of a social planner or a change in network tariff structures.
Following the development of decentralized generation and smart appliances, energy communities have become a phenomenon of increased interest. While the benefits of such communities have been discussed, there is increasing concern that inadequate grid tariffs may lead to excess adoption of such business models. Furthermore, snowball effects may be observed following the effects these communities have on grid tariffs. We show that restraining the study to a simple cost-benefit analysis is far from satisfactory. Therefore, we use the framework of cooperative game theory to take account of the ability of communities to share gains between members. The interaction between energy communities and the DSO then results in a non-cooperative equilibrium. We provide mathematical formulations and intuitions of such effects, and carry out realistic numerical applications where communities can invest jointly in solar panels and batteries. We show that such a snowball effect may be observed, but its magnitude and its welfare effects will depend on the grid tariff structure that is implemented, leading to possible PV over-investments. Cambridge Working Papers in Economics Faculty of Economics www.eprg.group.cam.ac.uk
We study the welfare impacts of national support schemes for generation capacity when energy markets are interconnected. Assuming perfect competition and inelastic demand, we compare the cases of an energy-only market with no support scheme, with a market with capacity payment and a market with strategic reserve. We find that if transmission system operators (TSOs) can't control exports and neighbours stick to an energy-only paradigm, a capacity payment is ineffective unless transmission capacity is small. If TSOs can control exports, the capacity payment attracts investments and foreigner's security of supply shrink. A neighbouring energy-only or strategic reserve market will thus be prejudiced in the long-run and may have to implement a capacity payment as well in order to meet its security of supply standard. Hence, capacity payments may spread in Europe thanks to their negative cross-border effect on investment incentives. This is in sharp contrast with the conventional wisdom, based on short-term arguments, that energy-only market will free-ride the security of supply provided by neighbouring capacity markets. A strategic reserve has no negative cross-border welfare externalities, but may allow neighbours to free-ride capacity. Our conclusions urge for the harmonization of capacity remuneration schemes across Europe.
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