Resource Adequacy Requirement: Reserve Margin, Contract Cover, and Price Caps

In setting RARs, some state agencies are proposing reserve margins greater than the pre-restructuring levels. But it would be a mistake to reach this conclusion unless other factors are explicitly considered. A simulation indicates that decisions on the reserve margin, the percentage of forward contract cover, and the level of price caps should not be made in isolation. The results support the conjecture that the higher the contract coverage, the less justifiable are high reserve margins or low price caps.