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Reconsidering Resource Adequacy, Part 1

Has the one-day-in-10-years criterion outlived its usefulness?

Fortnightly Magazine - April 2010

customers and the highest values for small commercial and industrial customers. However, outage cost surveys generally don’t account for whether customers with the highest VOLL have installed back-up power. A U.S. Department of Energy report in 2006 stated that a VOLL representing an average value in the range of $2,000 to $5,000/MWh is the “accepted industry practice.” 6 Based on these and other reviews, values can range from $2,000 to $20,000/MWh, but values in the $3,000 to $5,000/MWh range are considered most appropriate for analysis.

Capacity reserve costs, including the net cost of new capacity (net CONE), also factor into the 1-in-10 criterion’s economic analysis. The marginal cost of additional reserve capacity can be represented by the annualized cost of building and maintaining the least expensive form of reliable peaking capacity, usually considered to be a gas-fired combustion turbine. Values recently developed by PJM for use in its reliability pricing model (RPM) capacity mechanism can be used. While marginal capacity resources cannot expect much in the way of energy and ancillary services earnings, estimates of such net earnings reduce the cost of capacity and therefore factor into the analysis. The values used by PJM during the past year have ranged from roughly $70,000/MW-year to $130,000/MW-year on a levelized basis, with the range primarily reflecting the timing of the cost estimate (with lower estimates from 2005 and 2006, and higher estimates from 2008) and also location. 7 Energy and ancillary services earnings are estimated to range from approximately $10,000/MW-year to $50,000/MW-year in various locations in recent years. This suggests a net capacity cost (net CONE) range from about $40,000/MW-year to $120,000/MW-year. While the upper end of this range reflects the more recent data (but before the impacts of the 2009 recession on these costs), PJM’s capacity auction in 2008 cleared at a price close to the low end of this range, and its 2010 auction cleared at an even lower price.

Benefit vs. Cost

If the 1-in-10 criterion is being met ( i.e., the LOLE totals 0.1 events or less per year), the last MW of reserve capacity has a 10-percent chance of being needed to avoid or reduce an outage in any year. To determine the potential lost load precluded by an incremental MW ( i.e., to determine its marginal benefit), the appropriate geographic scope of the analysis must be identified. An incremental MW helps avoid or reduce load loss in all areas to which it is likely to be incrementally deliverable in the peak hours when the load loss might occur; so an incremental MW located within a transmission-constrained subarea helps avoid curtailment both within and outside the constrained area, while a MW located outside the constrained area cannot be counted on to help reduce load loss within the constrained area.

An assumption regarding the average duration of an outage also is required. An estimated five-hour duration for a typical rotating outage is based on review of hourly load shapes in a few areas of the country. Load levels tend to rise during the morning and afternoon and fall during the