Study of loss of load probability in designing installed capacity market

In this paper we first review the method of computing Loss of Load Probability (LOLP) as a means of assessing reliability. Then, we relate the method to the Installed Capacity (ICAP) mechanisms, which are currently being implemented in some regional US electricity markets as a necessary market process for ensuring long term reliability. The basic conclusion of the paper is that the current ICAP mechanisms do not accurately ensure a desired level of reliability, as intended. The reason for this situation is because the current ICAP mechanisms consider the expected value of available generation, which is only the first order simplification of probabilistic generator capacity modeling, while ignoring the second and higher orders. We use simple examples to illustrate this claim and its implications. The incentives created through ICAP mechanisms directly impact the investment decisions of new generation and transmission. Therefore, the findings presented in the paper are critical as we move forward with the restructuring process. To achieve the desired level of reliability through market process, this paper may lead to understanding better the necessary modifications to the current ICAP mechanisms.