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Is the Benefit of Reserve Requirements in the “Reserve” or the “Requirement”?

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  • Brennan, Timothy J.

    () (Resources for the Future)

Abstract

Reliability 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.

Suggested Citation

  • Brennan, Timothy J., 2008. "Is the Benefit of Reserve Requirements in the “Reserve” or the “Requirement”?," Discussion Papers dp-08-33, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-08-33
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    File URL: http://www.rff.org/RFF/documents/RFF-DP-08-33.pdf
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    References listed on IDEAS

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    1. Paul Joskow & Jean Tirole, 2007. "Reliability and competitive electricity markets," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 60-84, March.
    2. Timothy J. Brennan, 2004. "Market Failures in Real-Time Metering," Journal of Regulatory Economics, Springer, vol. 26(2), pages 119-139, September.
    3. Boyd, James & Ingberman, Daniel E, 1994. "Noncompensatory Damages and Potential Insolvency," The Journal of Legal Studies, University of Chicago Press, vol. 23(2), pages 895-910, June.
    4. Brennan, Timothy J., 2003. "Electricity Capacity Requirements: Who Pays?," The Electricity Journal, Elsevier, vol. 16(8), pages 11-22, October.
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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.

    More about this item

    Keywords

    electricity; reliability; reserve requirements; capacity;

    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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