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