Forward Reliability Markets: Less Risk, Less Market Power, More Efficiency

Peter Cramton and Steven Stoft ()

Papers of Peter Cramton from University of Maryland, Department of Economics - Peter Cramton

Abstract: A forward reliability market is presented. The market coordinates new entry through the forward procurement of reliability options—physical capacity bundled with a financial option to supply energy above a strike price. The market assures adequate generating resources and prices capacity from the bids of competitive new entry in an annual auction. Efficient performance incentives are maintained from a load-following obligation to supply energy above the strike price. The capacity payment fully hedges load from high spot prices, and reduces supplier risk as well. Market power is reduced in the spot market, since suppliers enter the spot market with a nearly balanced position in times of scarcity. Market power in the reliability market is addressed by not allowing existing supply to impact the capacity price. The approach, which has been adopted in New England and Colombia, is readily adapted to either a thermal or a hydro system.

Keywords: Auctions; electricity auctions; capacity auctions; reliability auctions (search for similar items in EconPapers)
JEL-codes: D44 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2008, Revised 2008
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Citations: View citations in EconPapers (87)

Published in Utilities Policy, 16, 194-201, 2008

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Journal Article: Forward reliability markets: Less risk, less market power, more efficiency (2008)
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