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

Timothy J. Brennan ()
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Timothy J. Brennan: Resources for the Future

Discussion Papers from 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.

Keywords: electricity; reliability; reserve requirements; capacity (search for similar items in EconPapers)
JEL-codes: L94 H23 D24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene
Date: 2008-09-18
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