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Capacity Markets: A Bridge to Recovery?

A review of the ongoing evolution of market design.

Fortnightly Magazine - May 2005

merchant plants. 3 For plants in other parts of NEPOOL, the shift will be less dramatic or perhaps even nonexistent. A plant in the proposed "Rest-of-Pool" zone will see little, if any, price appreciation.

While price shifts in tight locations like southwest Connecticut and eastern PJM may help struggling generators in the short term, they are unlikely to persist over the long term. There are essentially three outcomes for the revised markets, all of which should lead to prices that trend toward the mean. First, if the markets function as intended, high prices in load pockets will attract new resources that will alleviate the shortage and bring the zone back into equilibrium. This will serve to drive prices down in this region over a relatively short time horizon.

Another possibility is that new transmission capacity will be built that alleviates constraints within a zone and allows for more import capacity. This outcome also would put the same downward pressure on prices. In fact, some are calling already for NEMA/ SWCT zonal prices in New England to converge on Rest-of-Pool prices within one year of LICAP start because of planned transmission upgrades. Finally, if a new market structure leads to sustained high prices for merchant generators, it will be apparent that the market is not working as intended and regulators will be forced to reconsider the market structure due to the impact on consumers.


    1. This categorization excludes other ancillary services including spinning reserves, regulation, black-start capability, etc. Nevertheless, it is important to note that it is the combination of energy, ancillary services, and capacity products that provides a total revenue package to generators. But, since these other ancillary services do not differentiate the individual resource adequacy markets, a discussion of them is considered out of scope of this article.

    2. Many markets account for scheduled outages in determining unit availability.

    3. Final market designs may include mechanisms for subtracting infra-marginal revenues when determining capacity compensation. If this is ultimately adopted, assuming all else remains equal, the more a generator earns in the energy market the less it will earn in the capacity market.