The Challenges of Incorporating Consumer Reliability Preferences into Electricity Markets with a Capacity Requirement

One objective of retail electricity markets is to enable end-use consumers to incorporate their reliability
preferences into their purchasing decisions. This paper investigates if and how this can be done in
electricity markets with a capacity requirement. It integrates the standard loss of load and cost
minimization approach from the economic literature with probabilistic resource adequacy informed by
the engineering literature for electricity markets with capacity requirements. For these electricity
markets, a partial solution that allows retail consumers to opt out entirely or partially from capacity
markets could help improve social welfare. This solution allows consumers to use their individual
estimate of the cost of power outages based on the relevant outage characteristics instead of a system
planner estimating a generic value of lost load. The goal of achieving optimal levels of reliability remains
elusive, however, due to incomplete probabilistic reliability models, consumers’ inability to opt out of
capacity requirements, and transaction costs.

By: Frank A. Felder