Solving the Electricity Capacity Market Puzzle

The Bilateral Capacity Approach

Mandatory, centralized capacity auctions have been used to ensure adequate supply in some deregulated electricity markets for many years, with ongoing problems that always seem to need just one more market modification. Cliff Hamal concludes, however, that the auction structure itself is fundamentally flawed. Instead, he proposes a marketplace based on bilateral contracts that can address the wide-ranging challenges of not only supply adequacy, but environmental goals, locational challenges, reliability needs, and other public policy goals. Since published in 2013, industry developments and capacity market problems have only heightened interest in fundamental change—and validated the concerns he raised.

Under BiCap, the wires companies are responsible for purchasing capacity. They have the committed relationships with customers that allow them to make long-term commitments. This allows contracting to reduce borrowing costs, targeting new supply resources to meet local problems and direct comparison with transmission alternatives.

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