Ensuring Adequate Power Supplies for Tomorrow's Electricity Needs

Categories: Market Design, Wholesale Markets -    View PDF

June 16, 2014 - Kelly Eakin and Robert Camfield

The Electric Markets Research Foundation (Foundation) commissioned CA Energy Consulting to examine the ability of the U.S. electric power industry to build and maintain sufficient electric generating capacity to meet the country’s present and future needs.

Whether the electricity sector is able to continue to develop and maintain sufficient resources to “keep the lights on” now and in the future, referred to as resource adequacy, has emerged over the past several years as perhaps the greatest challenge facing the electric power industry. Potentially serious resource adequacy problems were laid bare by the recent “polar vortex” of January and February 2014, when record cold temperatures across most of the eastern and Midwestern United States had the industry scrambling to keep up with the demand for electricity. While the industry managed to avoid blackouts, a general consensus has emerged that the industry came perilously close to exceeding its limits to maintain electric system reliability.

Reliability is not the only issue. Shortages of power during the polar vortex created significant spikes in the price of wholesale power, which has quickly morphed into a political issue. U.S. Senator Charles Schumer has called for an FTC investigation into these price spikes in northern New York.

A key finding of this report is that problems of restructured markets with securing adequate resources stems from their seeking a market solution to a problem for which there is not a market solution within existing political and institutional frameworks. There have been many proposals made to reform capacity markets or to design new methods to ensure resource adequacy in the restructured markets, but most of these proposals assume that tweaks to the restructured market model will be sufficient. A more comprehensive solution is necessary, however. For example, the restructured markets could be designed so that capacity is procured in ways similar to those used in traditional regulated markets: set capacity requirements according to engineering criteria; impose high penalties on those LSEs who fail to meet their requirements; and offer a centralized market for those parties who find the centralized market’s terms attractive. Generation could be procured through competitive solicitation as it is done successfully in some traditionally regulated markets as well as in some restructured markets. And RTOs could continue to operate energy markets in the same way as they do today.

The link to the full report is given in the citation below.

Mathew J. Morey, Laurence D. Kirsch, B. Kelly Eakin, and Robert J. Camfield, Ensuring Adequate Power Supplies for Tomorrow’s Electricity Needs, prepared for the Electric Markets Research Foundation, June 16, 2014.