Reliability, resource adequacy, and capacity markets
This chapter focuses on a particular regulation-driven market design question that is unique to electricity – capacity markets. The question of resource adequacy is an intertemporal supply/demand coordination problem. The basic question is how to facilitate optimal future consumption and resource allocation. In addressing this challenge, our toolkit essentially consists of four tools: more generation, more transmission, less demand, and technological change that could affect any or all of the other three tools. No one knows the optimal combination of those four tools, and that combination is likely to be very local depending on the existing resource portfolio, customer characteristics, and so on. A capacity market is frequently discussed as a way to use price signals to induce investment in generation, and is in use in three of the RTOs/ISOs in the U.S. (Besser et al. 2002; Hobbs et al. 2001).