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Forward Capacity Markets: Theory and Design
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Forward reliability markets by Cramton and Stoft, 2008
The most up-to-date and accessible exposition of the theory and basic design of forward capacity and firm-energy markets.
Abstract: A forward reliability market is presented. The market coordinates new entry through the forward procurement of reliability options—physical capacity bundled with a financial option to supply energy above a strike price. The market assures adequate generating resources and prices capacity from the bids of competitive new entry in an annual auction. Efficient performance incentives are maintained from a load-following obligation to supply energy above the strike price. The capacity payment fully hedges load from high spot prices, and reduces supplier risk as well. Market power is reduced in the spot market, since suppliers enter the spot market with a nearly balanced position in times of scarcity. Market power in the reliability market is addressed by not allowing existing supply to impact the capacity price. The approach, which has Q2 been adopted in New England and Colombia, is readily adapted to either a thermal system or a hydro system.
Cramton, P., Stoft, S., Forward reliability markets: Less risk, less market power, more efficiency, Utilities Policy (2008), doi:10.1016/j.jup.2008.01.007
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The Convergence of Market Designs for Adequate Generating Capacity
Peter Cramton and Steven Stoft, April 2006
This paper compares ten different approaches on the basis of six fundamental criteria, and shows that there has been a convergence of the ICAP and Energy-Only approaches. It also discusses forward capacity markets in a bit more detail than our more recent paper.
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The Essence of the Capacity Adequacy Problem
Most Electricity markets are distorted by a two market flaws and an absurd misinterpretation of standard economics. Flaw 1: most demand is not spot-price responsive. Flaw 2: customers cannot be blacked out for insufficient supply contracts.
Flaw 1 means a competitive price is not guaranteed to clear the market, which means the market may or may not suffer from capacity shortages depending on the balance of market power and price regulations. Flaw 2 rules out a pure market solution.
Nonetheless most market designers still claim that an approximate solution is possible because "free competitive spot markets induce optimal capacity." This absurdly misinterprets and undergraduate economics theorem that has nothing to do withoptimal capacity for reliability. In fact the existence of a capacity-related reliability problem invalidates the theorem.
In essence, those who advocate energy-only solutions are claiming that a competitive market can induce the level of capacity that causes supply and demand to fail to intersect for an optimal percentage of time. No such view is held by anyone who understands undergraduate economics.
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http://stoft.com/p/18.html | 07/04/09 02:47 GMT
Modified: Sun, 09 Mar 2008 07:41:51 GMT
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Look Inside on Amazon
China has nixed caps for 15 years. Kyoto is stuck. Addiction continues. OPEC will soon return.
Environmental & energy-security forces distrust each other.
Carbonomics shows the policies of cooperation, the only path to success.
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