Is the Benefit of Reserve Requirements in the 'Reserve' or the 'Requirement'?

21 Pages Posted: 2 Jul 2008 Last revised: 27 Sep 2008

See all articles by Tim Brennan

Tim Brennan

University of Maryland, Baltimore County - Department of Public Policy; Resources for the Future

Date Written: September 18, 2008

Abstract

Reliability in electricity markets is, in many respects, a public good, in that one supplier's failure to meet its customers' demands can cause failure throughout the grid. This creates a blackout externality. One of the remedies for a blackout externality are reserve requirements, where load serving entities have capacity on hand to meet demand in case of unexpected surges in demand or unit failures. We model the magnitude of the externality as a positive function of use and negative function of capacity. Doing so reveals that a benefit of capacity requirements is that covering their costs imposes a tax on usage. After illustrating this possibility, a model looking at the sector as a whole, where spot markets can resolve individual but not overall shortfalls, illustrates that capacity requirements should be increased or decreased to exploit this usage tax effect.

Keywords: electricity, reliability, capacity, reserve requirements

JEL Classification: L94, H23, D24

Suggested Citation

Brennan, Tim, Is the Benefit of Reserve Requirements in the 'Reserve' or the 'Requirement'? (September 18, 2008). RFF Discussion Paper 08-33, Available at SSRN: https://ssrn.com/abstract=1154101 or http://dx.doi.org/10.2139/ssrn.1154101

Tim Brennan (Contact Author)

University of Maryland, Baltimore County - Department of Public Policy ( email )

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