Flexibility Compensation with Increasing Stochastic Variable Renewable Energy in Non-Convex Markets

Increasing shares of variable renewable energy (VRE) on the grid requires more flexible operation of other generation technologies. In an ideal energy-only market, prices should adequately compensate flexibility provision. While long-run cost recovery of generators can be achieved in a convex setting with marginal pricing, electricity markets exhibit non-convex costs and require non-convex pricing methods. We investigate how increasing VRE penetration impacts the type of technologies built, their payoffs, social surplus, and price distributions in a long-run resource mix adapted to a number of different non-convex pricing models. We find that non-convex energy-only markets can provide long-run cost recovery for flexible generators even as VRE penetration increases and that the impact of non-convexities decreases with increasing VRE.