IEEE Power & Energy Magazine - January/February 2021 - 34

contract for US$25/MWh for a certain hour of the day.
This supplier has two options for fulfilling this forward
contract: 1) produce the 100 MWh energy from its own
units at its marginal cost of US$20/MWh or 2) buy this
energy from the short-term market at the prevailing market-clearing price. The supplier will receive US$2,500
from the buyer of the contract for the 100 MWh sold,
regardless of how it is supplied. This means that the supplier maximizes the profits it earns from this fixed-price
forward contract sale by minimizing the cost of supplying
the 100 MWh of energy.
To ensure that the least-cost " make versus buy " decision for this 100 MWh is made, the supplier should offer
100 MWh in the short-term market at its marginal cost of
US$20/MWh. This offer price for 100 MWh ensures that if
it is cheaper to produce the energy from its generation units
(the market price is at or above US$20/MWh), the supplier's
offer to produce the energy will be accepted in the shortterm market. If it is cheaper to purchase the energy from the
short-term market (the market price is below US$20/MW),
the supplier's offer will not be accepted and the supplier will
purchase the 100 MWh from the short-term market at a price
below US$20/MWh.
This example demonstrates that the SFPFC approach to
long-term resource adequacy makes it expected profit maximizing for each seller to minimize the cost of supplying the
quantity of energy sold in this forward contract each hour of
the delivery period. By the logic of the previous example,
each supplier will find it in its unilateral interest to submit
an offer price into the short-term market equal to its marginal cost for its hourly SFPFC quantity of energy, in order
to make the efficient " make versus buy " decision for fulfilling this obligation.
Also, because all suppliers know that the sum of the
values of the hourly SFPFC obligations for all suppliers is
equal to the system demand, each firm knows that its competitors have substantial fixed-price forward contract obligations for that hour. This implies that all suppliers know
that they have limited opportunities to raise the price they
receive for short-term market sales beyond their hourly

Energy (MWh)

System Demand
400
300
200
100
Period 1

Period 2
Period 3
Time

Period 4

Daily Demand
100 + 200 + 400 + 300 = 1,000 MWh

figure 1. Hourly system demands.
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SFPFC quantity. For the previous example, the supplier
who owns 150 MWs of generation capacity has a strong
incentive to submit an offer price close to its marginal
cost to supply any energy beyond the 100 MWh of SFPFC
energy it is capable of producing. Therefore, attempts by
any supplier to raise prices in the short-term market by
withholding output beyond its SFPFC quantity are likely to
be unsuccessful because of the aggressiveness of the offers
into the short-term market by its competitors with hourly
SFPFC obligations.

The SFPFC Approach to Resource Adequacy
This long-term resource adequacy mechanism requires all
electricity retailers to hold SFPFCs for energy for fractions of realized system demand at various horizons to
delivery. For example, retailers, in total, must hold SFPFCs
that cover 100% of realized system demand in the current
year, 95% of realized system demand one year in advance
of delivery, 90% two years in advance of delivery, 87%
three years in advance of delivery, and 85% four years in
advance of delivery. The fractions of system demand and
the number of years in advance that the SFPFCs must be
purchased are parameters set by the regulator to ensure
long-term resource adequacy. In the case of a multisettlement LMP market, the SFPFCs would clear against the
quantity-weighted average of the hourly locational prices at
all load withdrawal nodes.
SFPFCs are shaped to the hourly system demand within
the delivery period of the contract. Figure 1 contains a sample pattern of the system demand for a 4-h delivery horizon.
The total demand for the 4-h is 1,000 MWh, and the four
hourly demands are 100, 200, 400, and 300 MWh. Therefore, a supplier that sells 300 MWh of SFPFC energy
has the hourly system, demand-shaped forward contract obligations of 30 MWh in hour one, 60 MWh in hour
two, 120 MWh in hour three, and 90 MWh in hour four as
shown for Firm 1 in Figure 2. The hourly forward contract
obligations for Firm 2 that sold 200 MWh SFPFC energy
and Firm 3 that sold 500 MWh of SFPFC energy are also
illustrated in Figure 2. These SFPFC obligations are also
allocated across the 4 h according to the same four hourly
shares of total system demand. This ensures that the sum
of the hourly values of the forward contract obligations for
the three suppliers is equal to the hourly value of the system demand. Taking the example of hour three, Firm 1's
obligation is 120 MWh, Firm 2's is 80 MWh, and Firm 3's
is 200 MWh. These three values sum to 400 MWh, which
is equal to the value of system demand in hour three, shown
in Figure 1.
These SFPFCs are allocated to retailers based on their
share of system demand during the month. Suppose that the
four retailers in Figure 3 consume 1/10, 2/10, 3/10, and 4/10,
respectively, of the total energy consumed during the month.
This means that Retailer 1 is allocated 100 MWh of the
1,000 MWh SFPFC obligations for the 4 h, Retailer 2 is
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IEEE Power & Energy Magazine - January/February 2021

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