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Decomposition and Optimization in Constructing Forward Capacity Market Demand Curves

Feng Zhao (fzhao***at***iso-ne.com)
Tongxin Zheng (tzheng***at***iso-ne.com)
Eugene Litvinov (elitvinov***at***iso-ne.com)

Abstract: This paper presents an economic framework for designing demand curves in Forward Capacity Market (FCM). Capacity demand curves have been recognized as a way to reduce the price volatility inherited from fixed capacity requirements. However, due to the lack of direct demand bidding in FCM, obtaining demand curves that appropriately reflect load’s willingness to pay for reliability is challenging. The proposed framework measures the value of reliability by the Cost of Unserved Energy (CUE), i.e., Expected Unserved Energy (EUE) multiplied by Value of Lost Load (VOLL). The total cost of capacity and CUE are then minimized, allowing economic tradeoffs between different reliability levels. EUE, a multivariate function of the total system capacity and its distribution among capacity zones, is decomposed into single-variable functions, which form the base for system and zonal demand curves. VOLL is implied from the Net Cost of New Entry (Net-CONE) based on long-term market equilibrium properties. The proposed framework is applied to a multi-zone ISO New England system to demonstrate its effectiveness.

Keywords: Capacity demand curve, Cost of New Entry (CONE), decomposition, Expected Unserved Energy (EUE), Forward Capacity Market (FCM), market equilibrium, value of reliability, Value of Lost Load (VOLL)

Category 1: Applications -- OR and Management Sciences (Finance and Economics )

Category 2: Applications -- Science and Engineering (Other )

Citation: September 2016 ISO New England, One Sullivan Road, Holyoke, MA 01040

Download: [PDF]

Entry Submitted: 09/16/2016
Entry Accepted: 09/17/2016
Entry Last Modified: 02/16/2017

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