Abstract
Resource adequacy challenges in energy-only markets have often led to the adoption of centralized capacity mechanisms. However, centralized approaches are problematic due to misalignment of incentives in central agency decision-making, difficulty inferring consumer preferences for reliability, lack of economic protection for consumers against reliability outages, and the challenge of allocating reliability costs through volumetric tariffs. This paper proposes a new model, the insurer-of-last-resort that works as a risk overlay on existing energy-only design. It unbundles energy and reliability and incorporates insurance-based risk management concepts to align incentives for centralized decisions and allows revealed consumer preferences to guide new capacity deployment.
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