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Capacity Markets and Capacity Market Designs

We’ve developed an industry-leading suite of simulation tools to support our clients’ needs for capacity market assessment.  We have employed these tools in engagements ranging from market design and economically-optimal reserve margin estimation to generation asset valuation and integrated resource planning.

We have worked extensively across all current and planned capacity markets in North America including PJM, ISO-NE, MISO, NYISO, AESO, and IESO.  Our modeling suite is able to leverage our clients’ detailed data, supplemented by additional inputs developed based on our broad experience, to provide a comprehensive package tailored to the specific context of each engagement.  Our capacity market simulation suite includes the following modules:

  • Reliability and Economic Valuation Module: Evaluates reliability metrics (e.g., EUE, LOLE, LOLH) across a range of reserve margins, given a system’s resource mix and outage risks, internal transmission constraints, interconnection with adjacent systems, and weather-driven load variability.  The module can be used to estimate the reserve margin needed to achieve a given reliability objective (e.g., 1-in-10 LOLE) as part of a traditional resource adequacy study.  It can also be used to evaluate tradeoffs between system costs, customer costs, and reliability, and to estimate an economically optimal reserve margin.
  • Single-Year Capacity Auction Module: Evaluates zone-level market clearing prices, quantities, and reliability metrics for a single capacity auction.  The single-year model represents the capacity market at a highly granular level, including a bottom-up estimate of the market-wide supply curve, detailed representation of zonal demand curves, topology and clearing mechanics, and near-term projections of the Net Cost of New Entry (Net CONE), reliability requirement, and other parameters. The module can be used to inform near-term generation asset or portfolio valuations or to evaluate the short-term impact of changes to market design.
  • Multi-Year Capacity Market Evolution Module: Supplements the single-year capacity auction module by evaluating the market’s year-by-year evolution over the medium term.  The module simulates plant-specific entry and exit decisions based on capacity market price and quantity outcomes, provides indicative system and customer cost estimates based on fleet-wide aggregate supply/demand balance, and assesses the shift in resource mix based on changes to market fundamentals.  The Multi-Year Capacity Market Evolution Module can be used to address asset or portfolio valuation or design questions where a somewhat longer term outlook is needed.
  • Long-Run Equilibrium Volatility Module: Evaluates long-run expected reliability, price volatility, and customer cost implications of one or more user-specified demand curves.  The module simulates entry and exit decisions made by market participants, which cause average prices to converge to Net CONE.  The module captures variability around this long-run average price by performing Monte Carlo simulations to generate distributions of price, quantity, and reliability outputs given realistic fluctuations in supply, demand, and transmission.  Similar to the other modules, the long-run module can be configured to reflect demand curves, and other market design elements, of existing or proposed capacity markets.  The module can be used to inform market design questions, or to inform the long-term elements of asset or portfolio valuation.

Engagements
REPRESENTATIVE ENGAGEMENTS

Below is a list of representative engagements for our Capacity Markets and Capacity Market Designs practice.

Review and simulation analysis of PJM's capacity demand curve

For PJM, we conducted all four official reviews of its Reliability Pricing Model (2008, 2011, 2014, and 2018). We evaluated the demand curve shape, the CONE parameter, and the methodology for estimating net energy and ancillary services revenues. We recommended improvements to support participation and competition, avoid excessive price volatility, and safeguard future reliability performance. We submitted testimony before the FERC and participated in settlement discussions.

ISO New England capacity demand curve

For ISO New England, Brattle worked with staff and stakeholders to develop a selection of capacity demand curves and evaluate them for their efficiency and reliability performance. Our experts began with a review of lessons learned from other markets and an assessment of different potential design objectives. We then developed and implemented a statistical simulation model to evaluate probabilistic reliability, price, and reserve margin outcomes in a locational capacity market context under different candidate demand curve shapes.

MISO capacity market redesign: designing and evaluating competitive retail solutions

For MISO, we evaluated design alternatives for accommodating the differing needs of states relying on competitive retail choice and integrated resource planning. We conducted probabilistic simulations of likely market results under alternative market designs and demand curves.  We also provided expert support in stakeholder forums and submitted expert testimony before the FERC.

Benefits of updating Ontario's wholesale market design

For the Ontario Independent Electricity System Operator (IESO), we estimated the likely benefit of Market Renewal efforts to update the design of Ontario’s energy market, improve system flexibility and operability, introduce an incremental capacity market, and increase the efficiency and utilization of the Province’s interties with neighboring power markets. We worked with IESO staff, the Market Renewal Working Group, the Market Surveillance Panel, and IESO stakeholders to document inefficiencies of the current market design and develop the framework for estimating Market Renewal benefits and implementation costs taking into consideration Ontario unique market structure, energy policy environment, and resource mix.

Design of market-based mechanism remunerating capacity and flexibility for a European market

For a European market, Brattle experts developed a high-level proposal for the design of the capacity and flexibility market mechanism. The need for these mechanisms is partly driven by substantial growth in wind and especially solar generation, which is changing the nature of reliability challenges in the electricity system. It is increasingly important not only to have a sufficient quantity of capacity, but also to ensure that a sufficient portion of that capacity is flexible. In this engagement, we started with a set of market design principles that reflect the system and policy objectives, drew on our substantial international experience with capacity mechanisms, and proposed a design package that produces efficient long-run investment incentives to attract an adequate quantity of traditional and flexible capacity to operate the system reliably in future years.

Evaluation of AESO's market design

Brattle evaluated the long-term sustainability of the Alberta Electric System Operator’s (AESO) energy-only market with respect to upcoming environmental and economic challenges. These challenges include the upcoming Canadian federal coal retirement mandate, worsening economics for coal generators, high load growth, and the expiration of PPAs on most of the generation fleet. The analysis included production cost simulations of the Alberta system under a variety of future scenarios. In 2013 we provided study updates to account for recent changes to policy and economic conditions.

Benefit-cost analysis of New York AC transmission upgrades

For the New York Department of Public Service (DPS) and NYISO, Brattle experts evaluated 21 alternative projects to increase transfer capability from Upstate to Southeast New York. We quantified a broad scope of economic benefits: traditional production cost savings from reduced congestion using GE-MAPS; additional production cost savings considering non-normal conditions; resource cost savings from being able to retire downstate capacity, delay of new entry, and shifting the location of future entry upstate; avoided costs from replacing aging transmission that would have to be refurbished; reduced costs of integrating new renewable resources upstate; and increased local tax receipts. The simulations enabled us to identify projects with the greatest and most robust net present value. The DPS used the analysis to inform its recommendation to the Public Service Commission to declare a “Public Policy Need” to build such a project.

Evaluation of New York transmission projects

For the New York Department of Public Service (DPS), we provided a cost-benefit analysis for the “TOTS” transmission projects. We showed net production cost and capacity resource cost savings exceeding the project costs, and the lines were approved. The work involved running GE-MAPS and a capacity market model, and providing insights to DPS staff.

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