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The Value of Resource Adequacy

Why reserve margins aren’t just about keeping the lights on.

Fortnightly Magazine - March 2011

substituting the 95th percentile cost for the weighted average cost is a proper risk adjustment, the target reserve margin increases from 12 percent to 15 percent—which, in the case of this system, happens to be close to the target reserve margin based on the 1-in-10 standard.

As Figure 2 also shows, increasing the target reserve margin from 12 percent to 15 percent by installing additional CT capacity decreases the maximal cost exposure from $8.3 billion to $4.0 billion. This increases the incremental carrying costs of CTs from approximately $150 million per year to about $250 million per year (as shown in Figure 1), which increases average retail rates by less than 1 percent. However, the maximum possible reliability-cost-related annual retail rate impact is reduced from 50 percent to only approximately 25 percent.

Capacity Value of Different Resources

Economic reliability modeling also quantifies the annual capacity value of different types of resources, such as CTs with and without environmental dispatch limits, storage devices, demand response resources with different dispatch costs and restrictions, or intermittent renewable resources. SERVM simulations show that the value of these resources differs significantly across power systems and depends greatly on a system’s resource mix. For example, the value of dispatch-limited demand-response resources will decline as their share increases and the dispatch limits bind more often. The simulations also documented that the resource adequacy value of intermittent resources, such as wind, is higher in a power system with hydro storage or other energy-limited resources. This is because even if intermittent resources don’t reliably generate during system peak, their generation during near-peak hours allows storage and other energy-limited resources to be conserved for peak periods.

Quantifying Tradeoffs

An economic simulation of system reliability offers substantial benefits and allows stakeholders to understand the costs, risks, and tradeoffs of resource adequacy policy options. Economic reliability analysis can provide a dramatically improved understanding of resource adequacy risks, and can help determine more cost-effective solutions that consider the tradeoff between the expected level and uncertainty of reliability-related costs. Additionally, this analysis can help decision makers understand the link between economically efficient target reserve margins and physical reliability standards such as the 1-in-10 standard, and quantify the resource adequacy value of different types of technologies, such as demand-response, storage, energy-limited, and renewable resources. Finally, it can inform stakeholders about the value customers are receiving from paying for reserve capacity. As the analysis shows, the value of additional reserves includes both the reduction in expected average reliability-related costs, such as the high cost of emergency purchases or the cost of curtailments; and the insurance value associated with the reduction of infrequent but extremely high-cost outcomes.



1. Calabrese, G., “Determination of Reserve Capacity by the Probability Method,” American Institute of Electrical Engineers , vol.69, no.2, pp.1681-1689, January 1950.

2. For example, see Wilson, James F., “ Reconsidering Resource Adequacy, Part 1 : Has the one-day-in-10-years criterion outlived its usefulness?” Public Utilities Fortnightly , April 2010 and “ Reconsidering Resource Adequacy, Part 2 : Capacity planning for the smart grid,” Public Utilities Fortnightly , May 2010.