A Capacity Market that Makes Sense

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dc.contributor.authorCramton, Peter
dc.contributor.authorStoft, Steven
dc.date.accessioned2007-08-21T14:23:18Z
dc.date.available2007-08-21T14:23:18Z
dc.date.issued2005-06-15
dc.description"A Capacity Market that Makes Sense," (with Steven Stoft) Electricity Journal, 18, 43-54, August/September 2005.en
dc.description.abstractWe 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.en
dc.format.extent55837 bytes
dc.format.extent69586 bytes
dc.format.mimetypeapplication/pdf
dc.format.mimetypeapplication/pdf
dc.identifier.urihttp://hdl.handle.net/1903/7083
dc.language.isoen_USen
dc.publisherElsevier Science
dc.relation.isAvailableAtDigital Repository at the University of Marylanden_us
dc.relation.isAvailableAtEconomics Departmenten_us
dc.relation.isAvailableAtCollege of Behavioral and Social Sciencesen_us
dc.relation.isAvailableAtUniversity of Maryland (College Park, Md.)en_us
dc.rights.licenseElectricity Journal: http://www.electricity-online.com/
dc.subjectcapacity marketen
dc.subjectmarket risken
dc.subject.otherelectricity market
dc.titleA Capacity Market that Makes Senseen
dc.typeArticleen

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