Cost-Effective Capacity Markets

36 Pages Posted: 21 Jun 2024

See all articles by Christoph Graf

Christoph Graf

Stanford University - Department of Economics

Christopher Holt

Institute for Policy Integrity

Burcin Unel

Institute for Policy Integrity at NYU School of Law

Date Written: June 13, 2024

Abstract

We develop a model of a wholesale electricity market with energy and capacity market components to examine the economic relationship between costs and reliability. We investigate the importance of efficient resource accreditation-the amount by which to compensate resources for their contribution to system reliability. We show that "marginal effective load carrying capability," an accreditation method increasingly adopted by system operators, is theoretically optimal. Applying our model to the PJM system, we empirically assess reliability costs, estimating that current reliability standards implicitly value a potential supply shortage at $54,000 to $77,000 per megawatt hour. Market outcomes are highly dependent on the accreditation methodology; inaccurate heuristics achieve reliability at 0.2 to 171 percent greater costs than the optimal method. By displacing expensive generation resources, improving reliability causes increases in capacity market payments that are largely, but not entirely, offset by decreases in energy market payments.

Keywords: Wholesale electricity market design, Capacity markets, Resource Adequacy

Suggested Citation

Graf, Christoph and Holt, Christopher and Unel, Burcin, Cost-Effective Capacity Markets (June 13, 2024). Available at SSRN: https://ssrn.com/abstract=4864513 or http://dx.doi.org/10.2139/ssrn.4864513

Christoph Graf (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
STANFORD, CA 94305-6072
United States

Christopher Holt

Institute for Policy Integrity ( email )

139 MacDougal St.
3rd Floor
New York, NY 10012
United States

Burcin Unel

Institute for Policy Integrity at NYU School of Law ( email )

139 MacDougal St
New York, NY 10012
United States

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