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Market design for resource adequacy: A reliability insurance overlay on energy-only electricity markets

Farhad Billimoria and Rahmatallah Poudineh

Utilities Policy, 2019, vol. 60, issue C, -

Abstract: Resource adequacy challenges in energy-only markets have often led to the adoption of centralized capacity mechanisms. However, centralized approaches are problematic due to misalignment of incentives in central agency decision-making, difficulty inferring consumer preferences for reliability, lack of economic protection for consumers against reliability outages, and the challenge of allocating reliability costs through volumetric tariffs. This paper proposes a new model, the insurer-of-last-resort that works as a risk overlay on existing energy-only design. It unbundles energy and reliability and incorporates insurance-based risk management concepts to align incentives for centralized decisions and allows revealed consumer preferences to guide new capacity deployment.

Keywords: Electricity market design; Resource adequacy; Reliability; Reliability insurance (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:juipol:v:60:y:2019:i:c:15

DOI: 10.1016/j.jup.2019.100935

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