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

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  • Billimoria, Farhad
  • Poudineh, Rahmatallah

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.

Suggested Citation

  • Billimoria, Farhad & Poudineh, Rahmatallah, 2019. "Market design for resource adequacy: A reliability insurance overlay on energy-only electricity markets," Utilities Policy, Elsevier, vol. 60(C), pages 1-1.
    • Handle: RePEc:eee:juipol:v:60:y:2019:i:c:15
    DOI: 10.1016/j.jup.2019.100935
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Yu-Chung Tsao & Thuy-Linh Vu, 2023. "Electricity pricing, capacity, and predictive maintenance considering reliability," Annals of Operations Research, Springer, vol. 322(2), pages 991-1011, March.
    2. Peng, Donna & Poudineh, Rahmatallah, 2019. "Electricity market design under increasing renewable energy penetration: Misalignments observed in the European Union," Utilities Policy, Elsevier, vol. 61(C).
    3. Simshauser, Paul, 2020. "Merchant renewables and the valuation of peaking plant in energy-only markets," Energy Economics, Elsevier, vol. 91(C).
    4. Simshauser, P., 2021. "Rooftop Solar PV and the Peak Load Problem in the NEM’s Queensland Region," Cambridge Working Papers in Economics 2180, Faculty of Economics, University of Cambridge.
    5. Farhad Billimoria & Filiberto Fele & Iacopo Savelli & Thomas Morstyn & Malcolm McCulloch, 2021. "On the Design of an Insurance Mechanism for Reliability Differentiation in Electricity Markets," Papers 2106.14351, arXiv.org.
    6. Chi-Keung Woo & Jay Zarnikau & Asher Tishler & Kang Hua Cao, 2022. "Insuring a Small Retail Electric Provider’s Procurement Cost Risk in Texas," Energies, MDPI, vol. 16(1), pages 1-12, December.
    7. Simshauser, Paul, 2022. "Rooftop solar PV and the peak load problem in the NEM's Queensland region," Energy Economics, Elsevier, vol. 109(C).
    8. Han Shu & Jacob Mays, 2022. "Beyond capacity: contractual form in electricity reliability obligations," Papers 2210.10858, arXiv.org.
    9. Hochberg, Michael & Poudineh, Rahmatallah, 2021. "The Brazilian electricity market architecture: An analysis of instruments and misalignments," Utilities Policy, Elsevier, vol. 72(C).
    10. Dongwei Zhao & Hao Wang & Jianwei Huang & Xiaojun Lin, 2022. "Insurance Contract for High Renewable Energy Integration," Papers 2209.10363, arXiv.org.
    11. Farhad Billimoria & Paul Simshauser, 2023. "Contract design for storage in hybrid electricity markets," Working Papers EPRG2304, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    12. Samuli Honkapuro & Jasmin Jaanto & Salla Annala, 2023. "A Systematic Review of European Electricity Market Design Options," Energies, MDPI, vol. 16(9), pages 1-26, April.
    13. Billimoria, Farhad & Fele, Filiberto & Savelli, Iacopo & Morstyn, Thomas & McCulloch, Malcolm, 2022. "An insurance mechanism for electricity reliability differentiation under deep decarbonization," Applied Energy, Elsevier, vol. 321(C).
    14. Qiao, Qiao & Zeng, Xianhai & Lin, Boqiang, 2024. "Mitigating wind curtailment risk in China: The impact of subsidy reduction policy," Applied Energy, Elsevier, vol. 368(C).
    15. Farhad Billimoria & Filiberto Fele & Iacopo Savelli & Thomas Morstyn & Malcolm McCulloch, 2023. "An Insurance Paradigm for Improving Power System Resilience via Distributed Investment," Papers 2302.01456, arXiv.org.

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