All PESD Publications Journal Articles The Electricity Journal Volume 35, Issue 7

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

August 1, 2022

High and growing shares of wind and solar generation can lead to economic retirements of controllable capacity, which creates 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 forward energy products sold through a centralized 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. This encourages 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. The SFPFC implementation in our games effectively maintained system reliability and delivered moderate costs to consumers while maintaining financial viability for gencos. It did this even in scenarios with high carbon prices and high renewable shares incentivized by a Renewable Portfolio Standard (RPS) with tradable Renewable Energy Certificates (RECs).