A Capacity Market that Makes Sense
A Capacity Market that Makes Sense
Files
Publication or External Link
Date
2005-06-15
Authors
Cramton, Peter
Stoft, Steven
Advisor
Citation
DRUM DOI
Abstract
We 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.
Notes
"A Capacity Market that Makes Sense," (with Steven Stoft) Electricity Journal, 18, 43-54, August/September 2005.