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~il~!I /". 6 ~~h' 1!'I teristics. Many believe that capacity markets need to have the ability to rec- ognizefuel and operating diversity to avoid dependenry on one fuel type and to maintain a fleet of resources that is capable of meeting all of the needs of the system operator in terms of ability to start quickly and follow load. Demand Curve. Finally, there has been one other major shortcoming observed in capacity market design that occurs on the demand side of the equa- tion, asopposed to the supply side issues like those already discussed. Most markets have utilized what is referred to as a "vertical demand curve" to date. This term refers to the construction of most markets where demand is set equal to the target reserve margin which, in effect, creates a fixed quantity that is completely price insensitive. While a description of the full dynamic of the pricing structures of demand curves are beyond the scope of this article, the vertical demand curve typically has created very volatile pric- ing. Historical pricing patterns in exist- ing capacity markets have tended to be shaped by boom/bust or floor/ceiling behavior where prices hover near zero when the market is oversupplied and jump to the capped price or deficienry level when the market passes through equilibrium and enters a period of shortage. This binary pricing pattern produces unwanted volatility that reduces the predictability of revenues for suppliers. Reduced predictability undermines new entrant planning or forces builders to raise costs by includ- ing apremium to cover this price risk. Capacity Market Evolution In response to these perceived short- comings, many markets are consider- ing, or already are undergoing, massive overhauls. Some are adding capacity markets for the first time, while others are adding new features to existing mar- kets. These overhauls are~spurring a new round of thinking on calpacity market design that appears to be leading to interesting-and increasjngly com- plex-new designs. While the final direction of the markers t•emalns to be seen, what is becoming a,~parent is a natural evolution in cap city market form and function. I The bottom of the evdlutionary lad- der (see Figure 1) can be defined as begin- ningwith NoCAP markets as seen in California and ERCOT. Given the issues associated with price caps in most mar- kets, this structure appears to be insuffi- cient. From there we move up the evolu- tionaryscale to simple, pool-wide capac- itymarkets like the current form of the PJM installed (ICAP), or unforced 26 Pueuc Ununes Foeneaxnr Mnv 2005 (UCAP), market. But, as discussed above, this relatively simple structure addresses the question ofvolume only. The locational ICAP market (LICAP) structure that follows the rela- tivelysimplistic ICAP/UCAP model adds a locational component to the pricing structure to add criteria for determining where in the pool new resources are constructed. The pro- posed system in New England, as well as the current system in New York, are examples of this LICAP approach. In addition to addressing location, the LICAP phase also has included modifications to the market-demand curve. By constructing what is referred to as a "sloped" or "curved" demand curve, market designers are attempting to fine-tune the timing of the new build signal and eliminate the binary pricing behavior observed in markets with verti- cal-demand curves. The sloped-demand curve attempts to add subtlety to the market signals by producing increas- ingly high levels of compensation for generators when the market moves towards scarcity levels, and by gradually decreasing levels of compensation when resources are adequate. PJM now is considering taking this a step further, to what can be referred to as "LICAP Plus." If the original PJM structure simply addressed the issue of how much, and the New York/New England LICAP markets add function- ality for addressing when and where, the new PJM design also will help determine what type. The scheme under discussion in PJM is designed to address the operational flexibility of the resources that are built. The proposal includes criteria to provide price distinction based on the ability of resources to follow load or provide quick-start functionality. This will help ensure that the generation mix as a whole is diverse enough to provide the full range of resources www.fortnightly.com