Energy-only vs. capacity markets: impact of hedging opportunities considering risk-averse investors

In this study, an agent-based model is developed to examine the impact of long-term bilateral contracts on the performance of energy-only markets and markets with capacity remuneration mechanism (CRMs). Specific emphasis is put on hedging via bilateral forward contracts. We found that bilateral contracts can indeed incentivize investments in new capacities and help to reach a relatively safe system margin, but at an increase in total system costs. Implementing CRMs, in the presence of bilateral contracts, lead to a higher and more stable system margin while maintaining the total system cost on a similar level.