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Capacity Markets Demystified

Emerging capacity auctions offer limited but valuable risk-management tools for asset owners.

Fortnightly Magazine - March 2008

standards, and so forth.

While the market therefore has an incentive to keep the lights on, any one asset or asset portfolio will be at risk as to just how the capacity payment mechanisms translate into revenue received.



1. About 351,000 MW out of a total of 918,000 MW, based on U.S. DOE summer 2006 capacity estimates (Energy Information Administration, Electric Power Annual 2006, Table 2.3.

2. Energy production is measured in MWh and typically priced as $/MWh; capacity is measured in MW and typically priced in $/kW-month or $/kW-year.

3. For this article, gross margin is the difference between the market price of energy and the power plant’s variable production costs, including fuel.

4. Typically the price of energy would be tied to a mutually agreed-upon price index.

5. For example, in California, utilities are required to contract for an 18-percent reserve margin.

6. Levelized revenue requirements typically include return of, and on, capital and can include items such as insurance, real estate taxes and fixed O&M.