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Why capacity market prices are too high

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  • Aagaard, Todd
  • Kleit, Andrew

Abstract

The Federal Energy Regulatory Commission and regional transmission organizations have fixated on a concern that prices in electricity capacity markets are too low. In fact, however, capacity markets are significantly overpriced. The reason for this is that the administratively determined demand curves in capacity markets create conditions that procure far more electricity capacity than what is needed to meet reliability objectives. In particular, the operators of these markets systematically overestimate both the relevant peak demand for electricity and needed payments for generators to enter the market. The result is that consumer pay billions of dollars extra for excess capacity.

Suggested Citation

  • Aagaard, Todd & Kleit, Andrew, 2022. "Why capacity market prices are too high," Utilities Policy, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:juipol:v:75:y:2022:i:c:s0957178722000017
    DOI: 10.1016/j.jup.2022.101335
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    References listed on IDEAS

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    1. Aagaard,Todd S. & Kleit,Andrew N., 2022. "Electricity Capacity Markets," Cambridge Books, Cambridge University Press, number 9781108747424.
    2. Wilson, James F., 2010. "Forward Capacity Market CONEfusion," The Electricity Journal, Elsevier, vol. 23(9), pages 25-40, November.
    3. Terence Lim, 2001. "Rationality and Analysts' Forecast Bias," Journal of Finance, American Finance Association, vol. 56(1), pages 369-385, February.
    4. Aagaard,Todd S. & Kleit,Andrew N., 2022. "Electricity Capacity Markets," Cambridge Books, Cambridge University Press, number 9781108489652.
    5. Rafal Weron, 2006. "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook0601.
    6. Francisco Moraiz and Dominic Scott, 2022. "The Impact of Capacity Market Auctions on Wholesale Electricity Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    7. Peter Cramton & Axel Ockenfels & Steven Stoft, 2013. "Capacity Market Fundamentals," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
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    Cited by:

    1. Komorowska, Aleksandra & Kaszyński, Przemysław & Kamiński, Jacek, 2023. "Where does the capacity market money go? Lessons learned from Poland," Energy Policy, Elsevier, vol. 173(C).

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