Forward reliability markets: Less risk, less market power, more efficiency
AbstractA 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 been adopted in New England and Colombia, is readily adapted to either a thermal system or a hydro system.
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Bibliographic InfoArticle provided by Elsevier in its journal Utilities Policy.
Volume (Year): 16 (2008)
Issue (Month): 3 (September)
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Web page: http://www.elsevier.com/locate/inca/30478
Other versions of this item:
- Peter Cramton & Steven Stoft, 2008. "Forward Reliability Markets: Less Risk, Less Market Power, More Efficiency," Papers of Peter Cramton 08frm, University of Maryland, Department of Economics - Peter Cramton, revised 2008.
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
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