Electricity Capacity Requirements: Who Pays?

Timothy Brennan

RFF Working Paper Series from Resources for the Future

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.

Keywords: capacity requirements; reserve requirements; electricity generation; utility regulation (search for similar items in EconPapers)
JEL-codes: H22 L51 L94 (search for similar items in EconPapers)
Date: 2003-08-30
New Economics Papers: this item is included in nep-ene and nep-pbe
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Citations: View citations in EconPapers (6)

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Journal Article: Electricity Capacity Requirements: Who Pays? (2003)
Working Paper: Electricity Capacity Requirements: Who Pays? (2003)
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