Increasing Backup Generation Capacity and System Reliability by Selling Electricity During Periods of Peak Demand

Meeting electricity demand during the 200 hours of greatest use each year is costly and challenging, especially in transmission constrained urban centers. Allowing installed backup and emergency generators to sell electricity for profit during peak demand and participate in the installed capacity (ICAP) market could lower the price of electricity and increase the reliability for all customers, not just the owners. The additional revenue could also provide an incentive for more customers to buy backup generators, adding still more reliability to the system. Here, we evaluate the economic potential of using backup generator for meeting peak electricity demand and ICAP requirements in the New York City – Long Island (NYC-LONGLI) region in New York (NY) State. First, we calculate the implicit value of unserved electricity as revealed by the investment in backup generator. Second, we evaluate the profit that would be earned by a backup generator available during the 200 peak hours each year, using the NYC and LONGLI zonal prices in 2005 and in 2006 as a case study. The profits from real electricity are calculated as the zonal prices minus the marginal cost of the generator. The profits from the ICAP market are equal to the clearing price minus the opportunity cost of being ready to operate. We then subtract the available profits from the costs of ownership (fixed costs) to estimate the ‘reduced’ implicit value of reliability, or the adjusted reservation price for purchasing a generator. We then estimate the increase in backup capacity. Finally, we address the effect of having all backup generators, rather than a single one, provide electricity to the market. We find that the implicit value of unserved electricity is much greater than the estimates in literature, since owners of backup generator reveal themselves to value electricity during lost service at approximately 26$/kWh or 85.9 $/kW – year. A single backup generator selling during the top 200 hours in NYC or LONGLI and participating in the summer and winter ICAP markets could generate sufficient revenue to lower its costs by approximately 80% with most of the profits from the ICAP market. If additional backup generators could earn this revenue, we estimate that this would result in adding 400 MW of backup generator capacity in NYC and 115 MW in Long Island. However, as additional backup generators produce power during the peak hours, they reduce the market clearing price for electricity. They also reduce the price in ICAP markets. If all of backup generation were bid into the market, we estimate that the market clearing price would equal the generation cost of these backup units, generating no revenue beyond variable cost. Similarly, the price in the capacity market would fall to zero. While making all the backup generators available during peak hours would not generate much additional revenue for the owners of the generators, it would save electricity customers a great deal of money, especially in the capacity market, as well as increase system reliability. We estimate a savings of $66 million and $75 million in electricity payments in NYC and LONGLI, respectively, and $1 billion and $500 million in the ICAP market in NYC and LONGLI, respectively.