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Reconsidering Resource Adequacy, Part 2

Capacity planning for the smart grid.

Fortnightly Magazine - May 2010

anticipated requirements that must be purchased the full three years in advance to less than 100 percent, in recognition of the availability of short lead-time resources, and also the uncertainty of the peak load forecast. PJM has implemented this change to its RPM mechanism. Additional flexibility for market participants to shift purchases and sales between the years-forward auctions and those closer to each delivery year, subject to limits to protect against market power, would contribute to market efficiency and reduce the risk of excess procurement and excessive capacity prices in forward markets. For example, allowing virtual capacity offers in the forward markets would provide such flexibility.

Adapting capacity procurement rules to afford greater flexibility will reduce the risk of procuring unneeded capacity that would preempt short lead-time resources and peak load reductions, and which may be more desirable and cost-effective ways to balance supply and demand.

If utilities and RTOs continue existing, conservative approaches to forecasting and planning for future capacity needs, they will maintain adequate capacity, but they also likely will undermine the actual need for, and value of, smart-grid enhancements and peak-reducing capability. If reserves continue to be planned for the “dumb peak” ( i.e., reflecting only contractually committed demand-response providers), there likely will be excess capacity and infrequent instances of low reserves and high prices, and, therefore, only weak price incentives for electricity consumers to invest in, and deploy, smart appliances and other peak-reducing technologies that realize the majority of their value at such times. Consumers could end up bearing both the cost of the excess capacity, and also the cost of the advanced meters and smart devices that could be of little value during the excess capacity conditions. In addition, the anticipated excess capacity, by reducing the need for, and value of, price response and energy efficiency, serves as a disincentive to achieving the targets set for their development.

Resource Adequacy on the Smart Grid

Longer term, when a substantial fraction of peak load has become price-sensitive and manageable, traditional resource adequacy planning approaches based on adequacy criteria ( i.e., such as “one-in-10”) will become both technically problematic and also unnecessary.

The common assumption that peak load is independent of supply availability no longer will hold, because prices increasingly will link peak demands (and especially the extreme peaks traditionally associated with loss-of-load risk) to supply conditions. When prices and incentives can reach high levels, possibly approaching VOLL, to call forth the maximum price response, modeling the circumstances under which firm curtailment could occur ( i.e., the basis of LOLE studies to determine one-in-10 reserve margins) becomes both more difficult and less meaningful. It becomes more difficult to accurately model firm curtailment circumstances because actual peak loads become highly dependent upon system conditions through the price link. And it becomes less meaningful to distinguish the circumstances under which firm curtailment might occur because, by definition, the average firm customer exposed to real-time prices is close to indifferent between paying prices close to VOLL or being curtailed.

To the degree price-responsive demand reduces peak loads and shifts load to