The conflict between resource adequacy and electricity markets

This paper presents a market design that recognize the resource adequacy problem. The New England ISO, having finally recognized the gravity of the resource adequacy problem is currently developing two major changes to its market structure; the locational installed capacity market (LICAP) utilizing an administratively determined ´demand´ curve and an ancillary services market including a product called locational forward reserves. While development of these new markets goes a long way to resolving the issue of attracting the long-term investment needed to assure reliability, they do not solve the fundamental problem of attracting needed long term investment with short term market signals. Entities must be assigned responsibility for maintaining the reliability of the power system and thus be required to obtain the required resources either through contract or direct ownership. A hybrid system that incorporates the benefits of short-term markets and transparent pricing with the need to assure reliability needs to be designed. As a starting point, the concept of ´competitive´ procurement has been advanced as a mechanism to assure long term adequacy while maintaining a spot energy market based on an LMP type regime to produce the appropriate short term signals.