Market design for resource adequacy: an insurance overlay on energy-only electricity markets
Resource adequacy challenges in energy-only markets have often led to the adoption of centralized capacity mechanisms. However, centralized approaches are problematic due to misalignment of incentives in central agency decision-making, difficulty inferring consumer preferences for reliability, lack of economic protection for consumers against reliability outages, and the challenge of allocating reliability costs through volumetric tariffs. This paper proposes a new model, the insurer-of-last-resort that works as a risk overlay on existing energy-only design. It unbundles energy and reliability, incorporates insurance-based risk management concepts to align incentives for centralized decisions, and allows revealed consumer preferences to guide new capacity deployment.
Billimoria, F. and Poudineh, R. (2019). ‘Market design for resource adequacy: an insurance overlay on energy-only electricity markets’, Utilities Policy, 59, 100935.