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Reliability Wars

Power System Planning: Who gets paid (and how much) for backing up the system?

Fortnightly Magazine - June 2005

California PUC fully implements its proposed rule for establishing a resource adequacy requirement (RAR). In broad terms the RAR can be thought of as a state-mandated equivalent of New England’s OC target. California’s RAR target would impose a planning reserve margin of between 15 to 17 percent above nominal load requirements, to be phased in by utilities over several years.

Space does not permit a full description here of the CPUC plan, let alone the latest version of the Cal-ISO’s MRTU, with its new, bid-based, security-constrained Day-Ahead settlement, and its Hour-Ahead preview of the real-time closing. For an overview of the origins of the Cal-ISO market design and the CPUC initiative, see “Market Design Still Eludes California,” published in Fortnightly’s Spark , March 2004. (Spark is the monthly online newsletter of Public Utilities Fortnightly . Access back issues at www.pur.com, using the user name and password published in each magazine issue, on the table of contents page. )

Nevertheless, for this discussion, at least two key points stand out.

First, the Cal-ISO’s peculiar RUC construct. Though it offers a payment for availability, RUC is not a product market. Rather, RUC is a sort of option—a call on generators that lets Cal-ISO hold the capacity in reserve, at the end of the Day-Ahead closing, as a hedge against a real-time supply deficiency. RUC is not designed as an incentive program to encourage gen plant construction over the long term. It is more like an insurance policy. It is a hedge against the specific risk of a shortage of energy (not capacity) in the short term. As Cal-ISO itself explains, the RUC availability payment “is essentially an up-front reservation payment for an energy service.”

Second, the real capacity element lies with the PUC’s enforceable RAR mandate. With the PUC worrying about the long-term outlook for generating resources, and the huge costs of the attempting to influence long-term investor behavior, the ISO is left free to manage short-term physical operations. (In fact, the Cal-ISO has raised key questions about how the PUC’s RAR standard will not work in practice unless it is designed carefully to account for grid congestion, constraints, and load pockets, which can block delivery of energy or capacity. See Figure 2 and explanatory notes. )

Overall, the California plan represents a bona fide experiment to meld the ISO’s technical expertise with the PUC’s political acumen.

In California at least, someone will be worrying about the cost of ensuring adequate resources, and whether we can afford it. 

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New York’s ICAP Update

The Update. In April, with minor modifications, the FERC OK’d the New York ISO’s proposed update to its ICAP plan, adjusting the demand curves that the ISO will use to calculate the monthly market price for electric capacity, for each of the ISO’s three separate locational ICAP zonal markets — (1) New York City, (2) Long Island, and (3) the zone for the rest of the state, known as NYCA (see figure 1) .

The ISO had proposed new demand curves for each zone for each of three prospective power