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The Value of Resource Adequacy

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

Fortnightly Magazine - March 2011

realistically also include costs associated with events such as calling on interruptible loads, dispatching high-cost emergency resources, and making unanticipated expensive market purchases. In the California energy crisis, for example, only approximately 8,000 MWh of firm load was shed during a total of 6 days. 5 Even if these load drops are priced at $10,000/MWh, the economic cost of the curtailments is only $80 million, which is a small fraction of the estimated $50 billion in total costs attributed to the crisis. 6 A resource adequacy assessment consequently should consider the full range of reliability-related events, not just firm load-shed events.

A typical criticism of the 1-in-10 standard is that it provides greater reliability than customers are willing to pay for—the argument being that even if the value of lost load is $20,000/MWh, the “last CT” [combustion turbine] would need to displace 5 hours of lost load per year to be economically justifiable—assuming the carrying cost of a CT is $100/kW-yr. However, analysis shows that the majority of customer-side reliability costs might not be incurred in the form of lost load, which means the last CT actually provides substantially more value than just offsetting the cost of firm load-shed event. When the full range of reliability-related impacts and costs are quantified, the 1-in-10 standard can result in target reserve margins that are either too low or too high from an economic efficiency and overall cost-effectiveness perspective, depending on system size, resource mix, and interconnections with neighboring system. A smaller system with weak interconnections to neighboring systems tends to have much less cost exposure at exactly the same level of physical reliability than a system with significant interconnections. For a larger system with a substantial amount of energy-limited resources and significant tie line assistance, the 1-in-10 standard yields a cost exposure that is much higher than for the other systems.

An economically efficient and cost-effective target reserve margin can differ significantly from the target reserve margins derived with the 1-in-10 standard—it can either be below or above current reserve margin targets based solely on physical reliability. Consequently, physical reliability standards should be supplemented and target reserve margins should be validated with an analysis of economic value and cost effectiveness, taking into account the full range and uncertainty of possible outcomes. Setting target planning reserves to include economic considerations achieves the goals of economic reliability planning. Consumers will enjoy a level of reliability they are willing to pay for while also taking cost uncertainty into account. They will be protected not only from excessive firm load shedding, but also from the high energy costs frequently associated with reliability-driven extreme market conditions.

Economic Reliability Modeling

Economic reliability modeling differs significantly from typical production cost modeling. Production cost modeling is designed to determine average costs with a handful of sensitivities, which makes it well-suited to performing fuel budget studies, RFP evaluations, and resource mix studies. However, the “average” nature of production cost simulations can’t realistically capture reliability events because they occur only infrequently based on a combination of extreme weather, under-forecast of load, and poor unit performance. The