All PESD Publications Working Papers Program on Energy and Sustainable Development

Game-based investigation of standardized forward contracting for long-term resource adequacy

April 1, 2022

High and growing shares of wind and solar generation can lead to economic retirements of controllable capacity, creating the need for long-term resource adequacy mechanisms that compensate units needed to maintain system reliability. We use game-based simulation to compare two approaches for ensuring long-term resource adequacy: capacity markets and forward contracting. We also conduct “policy prototyping” of a specific implementation of forward contracting, Standardized Fixed-Price Forward Contracts (SFPFCs). SFPFCs are standardized contract products sold through a standardized procurement process in which 100% of expected demand is auctioned off several years ahead of energy delivery. SFPFCs retroactively adjust contract quantities in each covered hour according to that hour’s share of total demand in the compliance period, thereby encouraging generating companies to manage the risk of higher-than expected demand in any given hour. Our game runs suggest that forward contracting can yield significantly lower cost to load than capacity markets because it removes the incentive for gencos to exercise unilateral market power in the short-term energy market. In our games, the SFPFC implementation proved effective at safeguarding system reliability and delivering moderate costs to consumers while maintaining financial viability for gencos, even in scenarios with high carbon prices and high renewable shares incentivized by a Renewable Portfolio Standard (RPS) with tradable Renewable Energy Certificates (RECs). Game-based policy prototyping encouraged us to revise our SFPFC proposal to eliminate one policy element, the “true-up auction,” that proved to be of secondary importance.