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Capacity and interruptible load markets

Wholesale electrical energy markets were instituted with the deregulation of vertically integrated utilities in 1978. Electricity generators (fossil fuel plants, nuclear, wind, solar ) compete with each other to sell electricity to end users and local distribution utilities. In energy markets, each generator bids a price to sell a certain amount of electrical energy (kWh, kilowatt-hours) for the following day. These kWh bids are tabulated according to price, and a price is struck where the energy bid equaled total energy demand. Generators who bid less than the strike price received the strike price (market clearing price) for electricity.


Energy markets are imperfect. By bidding a price for energy (kWh), generators were bidding their variable cost and there was no incentive to make new capital investments. Old generators with fully depreciated hardware have a cost advantage over new generators with mortgages (debt). The result is that systems develop capacity shortfalls which must be patched with special contracts or with supplementary capacity markets.




All clean energy generators (hydro, wind, solar, nuclear, geothermal electric) have little operating cost and substantial capital cost. This means that a fair market (aligns price with cost) would mainly compete the ability to deliver power (kW) not energy (kWh) during peak load. As the grid becomes clean, electricity markets will shift from being energy markets to being capacity markets to deliver reliable electric power. In a capacity market, generators offer a price for delivery of a certain amount of power (kW) during peak loads. Wind (negatively correlated with peak loads) would need to be paired with seasonal storage to reliably deliver power during peak loads.




Once a clean electric power system has sufficient capacity to satisfy peak load (for PJM 2013 figure below annual peak is 157 GW), it costs little more to operate that system full time at peak capacity. The excess electricity, beyond that required to satisfy hourly load with high reliability requirements, can be sold cheaply to electricity applications with low reliability requirements. This is the separate interruptible load market. Examples of interruptible load applications are buildings that can switch between natural gas and heat pumps based on lowest market price; also the electrolytic generation of hydrogen.


The figure below shows that once a clean system is designed to deliver reliable peak load electricity, the energy available on a low cost interruptable basis is about 43% of the energy available from capacity needed to reliably satisify peak load. [This figure notionally illustrates 15% reserves, 5% forced outage rate and 20% seasonal maintenance drawdown.]


Both capacity markets and interruptible load markets are inevitable. Rhodes proposes a structure for interruptible load markets. Analysis is needed on the impact of diurnal storage on interruptible load reliability, a more complete assessment of applications, and a transition plan.