Is the Benefit of Reserve Requirements in the “Reserve” or the “Requirement”?
AbstractReliability in electricity markets is, in many respects, a public good, in that one supplier’s failure to meet its customers’ demands can cause failure throughout the grid. This creates a blackout externality. One of the remedies for a blackout externality is a reserve requirement, where load-serving entities have capacity on hand to meet demand in the case of unexpected surges in demand or unit failures. Modeling the magnitude of the externality as a positive function of use and negative function of capacity reveals that a benefit of capacity requirements is that covering their costs imposes a tax on usage. After illustrating this possibility, a model addressing the sector as a whole, where spot markets can resolve individual but not overall shortfalls, illustrates that capacity requirements should be increased or decreased to exploit this usage tax effect.
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Bibliographic InfoPaper provided by Resources For the Future in its series Discussion Papers with number dp-08-33.
Date of creation: 18 Sep 2008
Date of revision:
electricity; reliability; reserve requirements; capacity;
Find related papers by JEL classification:
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
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