Report by Brattle Economists Reveals Significant Variations in Resource Adequacy Requirements Among North American Power Markets

CAMBRIDGE, Mass., Feb. 11, 2014 /PRNewswire/ -- Economists at The Brattle Group have prepared a report for the Federal Energy Regulatory Commission (FERC) that assesses the economic and reliability implications of different resource adequacy standards. Released by the FERC Sunday at the FERC-NARUC Collaborative, the report finds that the common one-day-in-ten-years ("1-in-10") resource adequacy standard varies greatly in how it is applied across North America.  The Brattle report surveys resource adequacy standards and finds that differences in definitions and accounting practices translate into a more than five percentage point difference in reserve margins.  

"These differences make it challenging to meaningfully compare reported reserve margins across regions," noted Johannes Pfeifenberger, a Brattle Principal and co-author of the study. "These variations also mean that a wide range of different reliability standards have been accepted by the industry and from a policy perspective—perhaps without a clear realization that these differences exist."

The study also examines the economic implications of the 1-in-10 resource adequacy standard compared to those of alternative reliability targets.  Using the Strategic Energy and Risk Valuation Model (SERVM) by Astrape Consulting, the authors conducted probabilistic simulations of hourly generation availability, load profiles, load uncertainty, transmission availability, and other factors to estimate economic and reliability metrics. Based on these simulations, the study finds that:

• The "economically optimal" reserve margin tends to be significantly below the planning reserve margins yielded by the traditional 1-in-10 resource adequacy standard unless regulators incorporate risk mitigation benefits into their decision making.
• Energy-only market designs, in particular those with price caps and an absence of scarcity pricing mechanisms, will not generally yield reserve margins as high as those based on the 1-in-10 standard desired by system operators and policy makers.
• A capacity market could be designed to achieve economically-optimal reserve margins through either: a) imposing economically-based, rather than physical reliability-based, planning reserve margin requirements, or b) implementing a demand curve for capacity that is designed to procure the cost-minimizing quantity of capacity.
• Increasing demand response penetration will result in higher average energy prices and higher frequency of scarcity pricing, with increased market efficiency but lower capacity prices.
• Total costs are very similar over a wide range of planning reserve margins, which means the choice of an energy-only or energy-plus-capacity market design does not by itself have great implications for average supplier net revenues or average consumer costs.
• Planning reserve margins higher than economically optimal will slightly increase costs but significantly reduce price volatility and customer cost uncertainty.

Although the study finds significant variation in how reserve margins are set within the industry, the apparent acceptability of these differences can provide a valuable opportunity for increased flexibility.  "A more explicit recognition of the significant variances in setting reserve margins that have in fact been acceptable from a policy perspective can provide an opening for more flexibility in setting resource adequacy targets. This flexibility will be increasingly necessary as the industry and its regulators consider resource adequacy in light of a host of new challenges, such as gas-electric interdependencies, increased penetration of intermittent resources and demand response, flexibility needs, and capacity market design," Pfeifenberger added.

The report, "Resource Adequacy Requirements: Reliability and Economic Implications," was authored by Mr. Pfeifenberger, Brattle Senior Associate Kathleen Spees, and Kevin Carden and Nick Wintermantel of Astrape Consulting. It is available for download at www.brattle.com.

The Brattle Group analyzes complex economic, finance, and regulatory questions for corporations, law firms, and governments around the world.  We are distinguished by the clarity of our insights and the credibility of our experts, which include leading international academics and industry specialists.  For more information, please visit www.brattle.com.

SOURCE The Brattle Group