A Nodal Capacity Market to Assure Resource Adequacy

In power systems with no transmission constraints a simple relationship links resource adequacy criteria LOLP or LOLE with VOLL. This relationship justifies the choice of the LOLP/LOLE criteria as a guiding principle for making optimal investments in generation expansion. In constrained power systems LOLP/LOLE criteria do not lead to optimal investment decisions. Locational resource adequacy requirements presently used in known capacity markets are not economically justified and do not lead to optimal investment decisions. We formulate the nodal capacity expansion problem in the form of a stochastic optimization based auction which solves for the optimal resource subject to resource adequacy criteria in the form of value of lost load. We explore the properties of this formulation, define locational capacity prices and a consistent system of load payments and generator compensations for reliability received and provided. Provided examples illustrate the importance of using the full network consideration in resource adequacy assessments.