Capacity Markets and Capacity Market Designs

We’ve developed an industry-leading suite of simulation tools to support our clients’ needs for capacity market assessment. We have employed these tools in engagements ranging from market design and economically-optimal reserve margin estimation to generation asset valuation and integrated resource planning.

We have worked extensively across all current and planned capacity markets in North America including PJM, ISO-NE, MISO, NYISO, AESO, and IESO. Our modeling suite is able to leverage our clients’ detailed data, supplemented by additional inputs developed based on our broad experience, to provide a comprehensive package tailored to the specific context of each engagement. Our capacity market simulation suite includes the following modules:

• Reliability and Economic Valuation Module: Evaluates reliability metrics (e.g., EUE, LOLE, LOLH) across a range of reserve margins, given a system’s resource mix and outage risks, internal transmission constraints, interconnection with adjacent systems, and weather-driven load variability. The module can be used to estimate the reserve margin needed to achieve a given reliability objective (e.g., 1-in-10 LOLE) as part of a traditional resource adequacy study. It can also be used to evaluate tradeoffs between system costs, customer costs, and reliability, and to estimate an economically optimal reserve margin.
• Single-Year Capacity Auction Module: Evaluates zone-level market clearing prices, quantities, and reliability metrics for a single capacity auction. The single-year model represents the capacity market at a highly granular level, including a bottom-up estimate of the market-wide supply curve, detailed representation of zonal demand curves, topology and clearing mechanics, and near-term projections of the Net Cost of New Entry (Net CONE), reliability requirement, and other parameters. The module can be used to inform near-term generation asset or portfolio valuations or to evaluate the short-term impact of changes to market design.
• Multi-Year Capacity Market Evolution Module: Supplements the single-year capacity auction module by evaluating the market’s year-by-year evolution over the medium term. The module simulates plant-specific entry and exit decisions based on capacity market price and quantity outcomes, provides indicative system and customer cost estimates based on fleet-wide aggregate supply/demand balance, and assesses the shift in resource mix based on changes to market fundamentals. The Multi-Year Capacity Market Evolution Module can be used to address asset or portfolio valuation or design questions where a somewhat longer term outlook is needed.
• Long-Run Equilibrium Volatility Module: Evaluates long-run expected reliability, price volatility, and customer cost implications of one or more user-specified demand curves. The module simulates entry and exit decisions made by market participants, which cause average prices to converge to Net CONE. The module captures variability around this long-run average price by performing Monte Carlo simulations to generate distributions of price, quantity, and reliability outputs given realistic fluctuations in supply, demand, and transmission. Similar to the other modules, the long-run module can be configured to reflect demand curves, and other market design elements, of existing or proposed capacity markets. The module can be used to inform market design questions, or to inform the long-term elements of asset or portfolio valuation.