1

Reserve Margin and

Capacity Markets

Ross Baldick

Electrical and Computer Engineering

Outline

Reserve margin definition,

ERCOT capacity additions,

Capacity adequacy concerns,

ERCOT reserve margin,

ERCOT energy only market,

Capacity market.

2

Reserve margin definition

Aka “planning reserve margin.”

For peak conditions in future season:

Given forecast of load,

Given forecast of generation additions (eg,

under construction or with firm commitments

to begin construction),

Given forecast of retirements,

What is: (generation capacity – peak

load)/peak load?

3

Reserve margin definition Typically, estimate of reserve margin

decreases into future because demand

grows, whereas not all future generation

additions have been announced yet.

In ERCOT, also adjustment of “capacity”

for likely wind production on peak.

Can also calculate reserve margin “after

the fact.”

ERCOT reserve margin historically

“required” to be around 13%, but without

strong theoretical justification. 4

-5,000

-3,000

-1,000

1,000

3,000

5,000

7,000

9,000

11,000

13,0001

99

5

1996

199

7

199

8

199

9

200

0

200

1

2002

200

3

200

4

200

5

200

6

200

7

200

8

2009

201

0

201

1

ERCOT Capacity Expansion (+) and Retirement (-) by Fuel Type [MW]

Coal(+) GAS-CC(+) GAS-CT(+) Wind(+)

Coal(-) GAS-CC(-) GAS-CT(-) GAS-ST(-)5

Most additions combined cycle

Considerable wind added

Capacity adequacy concerns. After 2003, most new generation additions

have been wind:

West Texas wind mostly generates off-peak,

Wind capacity does not contribute much to

meeting peak demand:

• “ERCOT Capacity” on next slide shows estimate of

contribution of wind to meeting demand at peak,

• Reserve calculation is “after the fact.”

Extreme temperatures in 2011 resulted in

record peak demand.

Current concerns as to whether generation

capacity will be adequate in future. 6

7

ERCOT energy-only market.

In ERCOT, primary remuneration from

centralized market is from sale of energy

(and ancillary services).

Offer caps are high, with anticipation that

during “scarcity” or near to scarcity

conditions, prices will rise to reflect

something like demand willingness-to-pay:

Well above variable costs,

“Scarcity rents” provide incentives for new

generation construction. 8

ERCOT energy-only market. If demand actively participates then, in

principle, market moves towards “optimal”

reserve margin that balances costs with

benefits.

ERCOT energy-only market is unique in

the US.

In practice:

Demand-side is not very active,

Proxies to willingness-to-pay are approximate

at best, and

Prices are not currently high enough to bring

forth new capacity. 9

Capacity market. Most Eastern US markets (NY, NE, PJM)

have an additional mechanism to bring

forth capacity:

Auction where forecast needs for capacity are

purchased in the one to several years ahead

timeframe.

Requires:

Commitment to purchase this capacity

whether forecast turns out correct or not,

Capacity to charge to load serving entities,

Mechanism for load serving entities to trade

out of obligations. 10