Constructing Demand Curves in Forward Capacity Market

This paper presents an economic framework for designing demand curves in Forward Capacity Market (FCM). Capacity demand curves have been recognized as a way to reduce the price volatility inherited from fixed capacity requirements. However, due to the lack of direct demand bidding in FCM, obtaining demand curves that appropriately reflect load's willingness to pay for reliability is challenging. The proposed framework measures the value of reliability by the avoided cost of unserved energy (CUE), i.e., Expected Unserved Energy (EUE) multiplied by Value of Lost Load (VOLL). The total cost of capacity and CUE are then minimized, allowing economic tradeoffs between different reliability levels. EUE, a multivariate function of the total system capacity and its distribution among capacity zones, is decomposed into single-variable functions, which form the base for system and zonal demand curves. VOLL is implied from the Net Cost of New Entry (Net-CONE) based on long-term market equilibrium properties. The proposed framework is applied to a multizone ISO New England system to demonstrate its effectiveness.