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Electricity Capacity Requirements: Who Pays?

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  • Brennan, Timothy J.

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.
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Suggested Citation

  • Brennan, Timothy J., 2003. "Electricity Capacity Requirements: Who Pays?," The Electricity Journal, Elsevier, vol. 16(8), pages 11-22, October.
    • Handle: RePEc:eee:jelect:v:16:y:2003:i:8:p:11-22
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    File URL: http://www.sciencedirect.com/science/article/pii/S1040-6190(03)00116-7
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    Cited by:

    1. Dina Mohamed Yousri, 2011. "The Egyptian Electricity Market: Designing a Prudent Peak Load Pricing Model," Working Papers 29, The German University in Cairo, Faculty of Management Technology.
    2. Brennan, Timothy J., 2008. "Is the Benefit of Reserve Requirements in the “Reserve” or the “Requirement”?," RFF Working Paper Series dp-08-33, Resources for the Future.
    3. Dina Mohamed YOUSRI, 2016. "The Egyptian Electricity Market: Designing a Prudent Peak Load Pricing System," Turkish Economic Review, KSP Journals, vol. 3(4), pages 677-682, December.
    4. Brennan, Timothy J., 2010. "Optimal energy efficiency policies and regulatory demand-side management tests: How well do they match?," Energy Policy, Elsevier, vol. 38(8), pages 3874-3885, August.
    5. Ochoa, Patricia, 2007. "Policy changes in the Swiss electricity market: Analysis of likely market responses," Socio-Economic Planning Sciences, Elsevier, vol. 41(4), pages 336-349, December.
    6. Ochoa, Patricia & van Ackere, Ann, 2009. "Policy changes and the dynamics of capacity expansion in the Swiss electricity market," Energy Policy, Elsevier, vol. 37(5), pages 1983-1998, May.

    More about this item

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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