ABSTRACT Capacity mechanisms serve as tools for controlling investment dynamics in various electric power generation technologies. Investment cycles, price spikes, and capacity and reserve shortages are among the challenges faced by different capacity mechanisms. In this manuscript, an improved capacity certificate mechanism is proposed to mitigate the challenges facing the dynamics of investment in electric power generation. Capacity certificates are introduced as tradable credits for electricity consumption. Under this mechanism, each generation unit can issue capacity certificates proportional to its production capacity and sell them in the capacity market to cover some of its costs. Additionally, each consumer must purchase capacity certificates corresponding to their consumption. Generation units must also acquire and provide capacity certificates relative to their retired capacity. In this mechanism, consumers will participate in production investments, and production capacity will be viewed as a capital asset. The proposed method also considers the possibility of demand‐side participation in the capacity certificate market. In fact, existing consumers can issue capacity certificates in proportion to their demand reduction. Thus, in the proposed method, in addition to partially solving the problem of financing for investment in electricity generation, the significant role of the demand sector in the capital market is also considered. The proposed mechanism has been simulated using Vensim software based on the system dynamics theory and compared with existing energy market mechanisms that only use price caps and capacity payments. The simulation results show that, under an energy‐only market with a price cap of 500 /MWh and an annual demand growth rate of 1. 5%, the system experiences recurring capacity shortages and investment cycles. While a capacity payment mechanism partially mitigates these problems, the proposed capacity certificate mechanism eliminates shortage events over the entire simulation horizon and stabilizes generation investment.
Sheibani et al. (Wed,) studied this question.