Part 4. Design for Stability

The simulations in Part 3 shows highly volatile behavior over a wide range of assumptions. We see cycles in the simulated price with different assumptions on investors' behavior, the attributes of new CCCTs, the price of natural gas and the growth in electricity demand. In the more troublesome cases, the oscillations take the form of a limit cycle in which the Px manager is forced to impose price caps during periods of under supply. These cycles appear in simulations with unusually constant conditions. If we see cyclical behavior under these carefully controlled conditions, we must conclude that we are looking an inherently unstable system.

The simulations envision a western market following the Px rules in California. The California Px is based on the premise that investors will be able to recover the full cost of a new CCCT based on an energy price set in a competitive market. The simulations show that cycles could emerge if we continue to rely on this premise. The cycles are particularly troublesome if CCCT costs and gas prices work against the competitive advantage of a new CCCT. It appears that investors need an additional incentive beyond the Px energy price. At this point, it makes sense to consider capacity payments to provide the needed incentive.

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Background on Capacity Payments | Adding Capacity Payments to the Model
Simulated Impact of Capacity Payments
The Price of Stability
The Wholesale Imapct of Capacity Payments | The Retail Impact of Capacity Payments
Conclusions

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