View Full Document

Ensuring Generation Adequacy in Competitive Electricity Markets



View the full content.
View Full Document
View Full Document

37 views

Unformatted text preview:

Energy Policy and Economics 007 Ensuring Generation Adequacy in Competitive Electricity Markets Shmuel S Oren June 2003 This paper is part of the University of California Energy Institute s UCEI Energy Policy and Economics Working Paper Series UCEI is a multi campus research unit of the University of California located on the Berkeley campus UC Energy Institute 2547 Channing Way Berkeley California 94720 5180 www ucei org This report is issued in order to disseminate results of and information about energy research at the University of California campuses Any conclusions or opinions expressed are those of the authors and not necessarily those of the Regents of the University of California the University of California Energy Institute or the sponsors of the research Readers with further interest in or questions about the subject matter of the report are encouraged to contact the authors directly Ensuring Generation Adequacy in Competitive Electricity Markets12 Shmuel S Oren3 University of California at Berkeley Revised June 3 2003 Abstract This paper discusses alternative approaches that have been adopted around the world for guaranteeing the appropriate level of investment in electric generation capacity We argue that long term reserves should be viewed as price insurance and be treated as a private good However political realities and asymmetries and distortions in risk management incentives may necessitate imposition of mandatory levels of such insurance on load serving entities Furthermore centralized markets may be needed as a supplement to bilateral contracting in order to facilitate efficient procurement of such insurance and to bridge the gap between the needs of generators and load serving entities with regard to duration of hedging instruments We discuss the origins and shortcomings of capacity payments and capacity obligations and explain how long term supply contracts in the form of call options with premiums that depend on the contracts strike prices can meet the need for ensuring supply adequacy and the financial health of the generation sector We also outline a scheme were regulatory intervention in generation adequacy assurance takes the form of a hedging requirement imposed at the state level on load serving entities 1 INTRODUCTION The reliability of electricity supply has been one of the overriding concerns guiding the restructuring of the electric power industry The slogan keeping the lights on has been the principal motivation for many technical and economic constraints imposed on market designs The term supply reliability encompasses however a mix of system attributes that have diverse economic and technical implications under alternative market structures NERC National Electric Reliability Council defines reliability as the degree to which the performance of the elements of the technical system results in power being delivered to consumers within 1 This paper was prepared under contract from the Electric Power Research Institute 2 Some of the material contained in this paper is based on an earlier publication by the author Capacity Payments and Generation Adequacy in Competitive Electricity Markets in Proceedings of SEPOPE IIV Conference Curitiba Brazil May 22 26 2000 3 Department of IEOR University of California at Berkeley Berkeley CA 94720 USA Oren IEOR Berkeley Edu accepted standards and in the amount desired Imbedded within this definition is the notion of the obligation to serve which is arguably out of step with the notion of a deregulated industry with competitive supply In fact the concept of reliability as defined by NERC encompasses two attributes of the electricity system Security which describes the ability of the system to withstand disturbances contingencies and Adequacy which represents the ability of the system to meet the aggregate power and energy requirement of all consumers at all times The notion of system security identifies short term operational aspects of the system which are characterized through contingency analysis and dynamic stability assessments Security is provided by means of protection devices and operation standards and procedures that include security constrained dispatch and the requirement for so called ancillary services such as voltage support regulation AGC capacity spinning reserves black start capability etc The notion of adequacy on the other hand represents the systems ability to meet demand on a longer time scale basis considering the inherent fluctuation and uncertainty in demand and supply the non storability of power and the long lead time for capacity expansion Generation adequacy has been traditionally measured in terms of the amounts of planning and operable reserves in the system and the corresponding loss of load probabilities LOLP that served as criteria for planning and investment decisions From a technical perspective security and adequacy are clearly closely related since a system with abundance of reserve capacity provides more flexibility in handling unforeseen disturbances However while a system with limited planning reserves may experience shortages it can still be operated in a secure manner while a system with ample reserve can be operated insecurely All the restructured electricity systems around the world recognize the need for centralized provision and control of ancillary services that are procured by the system operator either through an auction based market or through long term contracts with generators In some cases market participants are allowed to self provide certain ancillary services but the quantities are dictated by the system operator who is also the provider of last resort for these services With respect to long term reserves however there is considerable diversity in reliance on market based approaches and the debate over which is the correct way of ensuring generation adequacy is still raging In California for instance where the initial market design relied on a pure market solution for provision of generation adequacy the capacity shortages experienced in 2001 have prompted a proposal for an available capacity requirement ACAP to be imposed on load serving entities Discussions concerning the appropriate form of regulatory intervention in generation adequacy assurance are also taking place in Texas were currently generation reserves are plentiful but the the California experience raises concern for the future FERC s NOPR on Standard Market Design SMD 4 also recognized the


Access the best Study Guides, Lecture Notes and Practice Exams

Loading Unlocking...
Login

Join to view Ensuring Generation Adequacy in Competitive Electricity Markets and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Ensuring Generation Adequacy in Competitive Electricity Markets and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?