College of Behavioral & Social Sciences
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The collections in this community comprise faculty research works, as well as graduate theses and dissertations..
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Item A Capacity Market that Makes Sense(Elsevier Science, 2005-06-15) Cramton, Peter; Stoft, StevenWe argue that a capacity market is needed in most restructured electricity markets, and present a design that avoids problems found in the early capacity markets. The proposed market only rewards capacity that contributes to reliability as demonstrated by its performance during hours in which there is a shortage of operating reserves. The capacity price responds to market conditions, increasing when and where capacity is scarce and decreasing to zero when and where it is plentiful. Market power in the capacity market is addressed by basing the capacity price on actual capacity, rather than bid capacity, so generators cannot increase the capacity price by withholding supply. Actual peak energy rents (the short-run energy and reserve profits of a benchmark peaking unit) are subtracted from the capacity price. This allows the capacity market to more accurately control short-run profits and suppresses market power in the energy market. This design both avoids and hedges energy market risk, and by suppressing market power avoids regulatory risk. Risk reduction saves consumers money as do the performance and investment incentives inherent in the pay-for-performance mechanism.Item The Convergence of Market Designs for Adequate Generating Capacity With Special attention to the CAISO’s Resource Adequacy Problem(2006-04) Cramton, Peter; Stoft, StevenThis paper compares market designs intended to solve the resource adequacy (RA) problem, and finds that, in spite of rivalrous claims, the most advanced designs have nearly converged. The original dichotomy between approaches based on long-term energy contracts and those based on short-term capacity markets spawned two design tracks. Long-term energy contracts led to call-option obligations which provide marketpower control and the ability to strengthen performance incentives, but this approach fails to replace the missing money at the root of the adequacy problem. Hogan’s (2005) energy-only market fills this gap. On the other track, the short-term capacity markets (ICAP) spawned long-term capacity market designs. In 2004, ISO New England proposed a short-term market with hedged performance incentives essentially based on high spot prices. In 2005, we developed for New England a forward capacity market, with load obligated to purchase a target level of capacity covered by an energy call option. The two tracks have now converged on two conclusions: (1) High real-time energy prices should provide performance incentives. (2) High energy prices should be hedged with call options. We argue that two more conclusions are needed: (3) Capacity targets rather than high and volatile spot prices should guide investment, and (4) Long-term physically based options should be purchased in a forward market for capacity. The result will be that adequacy is maintained, performance incentives are restored, market power and risks are reduced from present levels, and prices are hedged down to a level below the present price cap.Item Uniform-Price Auctions in Electricity Markets(Elsevier Science, 2006-03-20) Cramton, Peter; Stoft, StevenWholesale electricity markets are commonly organized around a spot energy market. Buyers and suppliers submit bids and offers for each hour and the market is cleared at the price that balances supply and demand. Buyers with bids above the clearing price pay that price, and suppliers with offers below the clearing price are paid that same price. This uniform-price auction, which occurs both daily and throughout the day, is complemented by forward energy markets. In practice, between 80 and 95 percent of wholesale electricity is traded in forward energy markets, often a month, or a year, and sometimes many years ahead of the spot market. However, because forward prices reflect spot prices, in the long run, the spot market determines the total cost of energy. It also plays a critical role in the least-cost scheduling and dispatch of resources, and provides an essential price signal both for short-run performance and long-run investment incentives. Arguments that the uniform-price auction yields electricity prices that are systematically too high are incorrect. However, insufficiently hedged spot prices will result in energy costs that fluctuate above and below the long-run average more than regulated prices and more than is socially optimal. Tampering with the spot price would cause inefficiency and raise long-term costs. The proper way to dampen the impact of spot price fluctuations is with long-term hedging. Although re-regulation can provide a hedge, there are less costly approaches.Item Simulation of the Colombian Firm Energy Market(University of Maryland, 2006-12) Cramton, Peter; Stoft, Steven; West, JeffreyWe present a simulation analysis of the proposed Colombian firm energy market. The main purpose of the simulation is to assess the risk to suppliers of participation in the market. We also are able to consider variations in the market design, and assess the impact of alternative auction parameters. Three simulation models are developed and analyzed. The first model (Model 1) uses historical price data from October 1995 through May 2006 to assess the performance risk of hypothetical thermal and hydro generating units. The second model (Model 2) uses historical price and operating data to assess performance risk of the actual generating units in Colombia over the same period. This analysis allows us to assess company risk. The third model (Model 3) differs from the other models in that it explicitly models the firm energy auction and investments going forward. Thus, the model is able to assess how the distribution of firm energy purchases differs from the firm energy target, and how this distribution depends on the firm energy demand curve. Model 3 also studies the investment decisions of suppliers, the impact of lumpy investments, and the impact of a higher scarcity price.Item Colombia Firm Energy Market(Hawaii International Conference on System Sciences, 2007-01) Cramton, Peter; Stoft, StevenA firm energy market for Colombia is presented. Firm energy—the ability to provide energy in a dry period—is the product needed for reliability in Colombia’s hydrodominated electricity market. The firm energy market coordinates investment in new resources to assure that sufficient firm energy is available in dry periods. Load procures in an annual auction enough firm energy to cover its needs. The firm energy product includes both a financial call option and the physical capability to supply firm energy. The call option protects load from high spot prices and improves the performance of the spot market during scarcity. The market provides strong performance incentives through the spot energy price. Market power is addressed directly: existing resources cannot impact the firm energy price. Since load is hedged from high spot prices, the market can rely on high prices to balance supply and demand during dry periods, rather than rationing.