Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Reconsidering Resource Adequacy, Part 2

Capacity planning for the smart grid.

Fortnightly Magazine - May 2010

adjacent hours, there will be many more hours with load near the maximum levels; as a result, the highest-cost peaking capacity that’s needed primarily for reliability will be called upon much more frequently. To accomplish these load reductions, prices will be somewhat elevated, and the marginal peaking generation should earn much more than under the present circumstances, when it runs so infrequently (“one-day- in-10 years”).

Under these circumstances, the symptom of inadequate capacity no longer will be unacceptably frequent involuntary firm curtailments, as assumed under the traditional approaches to calculating reserve requirements based on LOLE criteria. Instead, the symptom of inadequate capacity will be too many hours with high prices and substantial voluntary, price-induced customer reductions, imposing a cost on these customers that exceeds the incremental cost of additional peaking capacity.

Part I of this article explained that the level of capacity is optimal and efficient when the incremental cost of additional capacity equals its incremental benefit; and historically, the benefit had to do with reducing the risk of having to curtail firm customers. On a system with substantial price-responsive demand, the incremental benefit of capacity results from the additional service provided to price-responsive customers, as the need to involuntarily curtail firm loads due to inadequate resources becomes increasingly unlikely. Put differently, supply additions will result from the interplay of supply and demand, as they do for other goods and services, rather than administrative planning criteria and reliability rules.

Ultimately, the conservative one-in-10 resource adequacy criterion, to the extent it will remain possible to meaningfully apply it, will suggest levels of capacity lower than the optimal amounts, and less than the amounts that will be provided under market incentives. As markets and prices rather than reliability rules begin to determine capacity levels, the RTOs’ capacity mechanisms can be phased out, as such payments no longer will be needed to achieve acceptable levels of reliability (see illustrative example in sidebar) . The shift away from revenue recovery through capacity payments also will help achieve goals for attracting renewable resources, which capacity values typically are deeply discounted.

The future holds more instances with (at least a chance of) high prices and low reserves.

In the past and at present, with limited ability to manage peak loads, providing a high level of reliability requires planning a capacity margin over extreme peak load levels that are unlikely to occur. As a result, there nearly always is abundant capacity and operating reserves rarely fall below desired levels. As peak loads become more manageable and price-driven, generating capacity should be planned assuming the capability actually will be used. Even during the transitional period, the planning outlook should include more frequent short periods of low reserves and rising prices—or at least the potential for these conditions, unless there is sufficient demand and supply response. If there is sufficient response, price spikes won’t occur, or will be brief and muted. And activation of demand-side reductions should not be considered indicative of a failure to plan and build adequate resources. These actions become part of the plan, to be expected, up