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Customers Interrupted

Utilities that are short on capacity and operate in a stable regulatory environment may be able to extract value from interruptible rates.
Fortnightly Magazine - October 1 2003

(variable) costs based on its potential utilization. Similarly, while valuing the capacity (or demand) portion of the rate, the "equivalent" capacity and financial value is determined. The "equivalent" capacity is derived from the demand-side option's reliability and economic dispatch contribution. The majority of a supply-side's variable costs are energy related. The demand-side's energy value can be calculated using the comparable supply-side's energy cost.

Reliability and Economic Dispatch Contribution

As a utility proceeds through its annual resource planning, it establishes a capacity position for the foreseeable future. A utility's capacity position includes forecasted peak load, supply-side capabilities, and demand-side capabilities. AmerenUE reports capacity capabilities according to Mid-America Interconnected Network (MAIN) Guidelines (3B and 4) using the MAIN summer assessment, winter assessment, and EIA (Energy Information Administration) form 411. In addition, MAIN compliance staff perform capacity audits beginning in the early spring of each year.

Resources listed on the capacity assessments have varying value to the utility. This point is worth repeating: All capacity, supply or demand, does not have the same financial value to a utility. The value of any capacity is dependent upon the operating characteristics of that particular resource. One megawatt of coal generation capability is not equal to one megawatt of gas generation capability. Why? The capacity position is the calculation of the amount of reserve megawatts at time of system peak and does not provide an indication of the capacity, or load relief, which is available throughout the entire year to meet customer requirements.

The ideal approach for developing capacity cost-based incentives requires the following steps:

  • Determine reliability contribution of nonfirm service.
  • Adjust the resource plan according to the difference in reliability from the target level.
  • Determine the value of the capacity (or contract) deferred or eliminated.

In a 1993 article, Peter Jackson offered a conceptual basis for thinking about demand-side reliability within the broader framework of the planning process. In the article, he reviewed two methodologies utilities used in Illinois for quantifying the value of DSM reliability. The two methods he compared are the Reserve Margin Adder Method (RMA) and Capacity Equivalence Method (CE). RMA uses a simple and straightforward approach of adding a reserve margin credit to the level of capacity reduction at the point of use. For example, a utility with a 15 percent planning reserve margin would have a 1.15 MW reduction in demand for each 1 MW reduction that is attributed to a DSM resource. CE is less straightforward but reflects the fact that availability of a DSM resource may vary throughout the year. The CE method is a superior methodology for two basic reasons: 1) It reflects a demand-side resources contribution for the entire year; and 2) It establishes an accurate relationship between demand-side and supply-side alternatives.

To determine the reliability contribution of a demand-side resource using CE, a relationship is calculated to a supply-side resource. CE is the true capacity value of a resource (DSM, DR, wind, hydro, etc.) compared to a supply-side option. To determine the capacity equivalence, AmerenUE uses the same calculation MAIN uses to determine reserve margin: Loss-Of-Load Probability