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Electricity Capacity Requirements: Who Pays?

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  • Brennan, Timothy

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    (Resources for the Future)

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    Abstract

    Reserve requirements in electricity markets may get each producer to internalize the cost of grid-wide blackouts it might cause if unable to meet consumer demand. Markets for how such capacity might be procured have been studied. Less examined is how the costs of reserve capacity are covered. “Who pays” depends on how requirements are designed. If each producer has to provide peak capacity available to a grid operator at a below-spot price, requirements will increase volatility—that is, the gap between baseload and marginal peak prices. Requirements based on energy sales act as a tax on baseload to subsidize peak, reducing volatility. Finally, if requirements are designed to ensure that extreme-peak energy is available without scarcity rents, baseload prices remain unaffected, but (nonextreme) peak prices increase. Although this pattern seems unrelated to any economic or social goal, it replicates what one might see under crude seasonal or time-of-use pricing.

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    Bibliographic Info

    Paper provided by Resources For the Future in its series Discussion Papers with number dp-03-39.

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    Date of creation: 30 Aug 2003
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    Handle: RePEc:rff:dpaper:dp-03-39

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    Related research

    Keywords: capacity requirements; reserve requirements; electricity generation; utility regulation;

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    Cited by:
    1. Brennan, Timothy J., 2010. "Optimal energy efficiency policies and regulatory demand-side management tests: How well do they match?," Energy Policy, Elsevier, vol. 38(8), pages 3874-3885, August.
    2. Ochoa, Patricia & van Ackere, Ann, 2009. "Policy changes and the dynamics of capacity expansion in the Swiss electricity market," Energy Policy, Elsevier, vol. 37(5), pages 1983-1998, May.
    3. Dina Mohamed Yousri, 2011. "The Egyptian Electricity Market: Designing a Prudent Peak Load Pricing Model," Working Papers 29, The German University in Cairo, Faculty of Management Technology.

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