Now, I'd think that the smart way to run peaker plants is to enter into long-term insurance-style contracts, where the utility buys capacity rather than power. But then, I don't know the business either.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
In a non-market system, the utility knows its needs, builds the plant, and turns it on when demand requires it.
In a market system, the plant designates the price it needs to be profitable (ie it sets a mimimun price t obe dispatched), and during demand peaks, power prices will get to the price required for that plant's bid to be accepted, and it will then be turned on to fulfill that "contract." Such plant would designate its price depending on its expectation of the number of demand peaks which will require it to run (knowing the rest of the supply curve, and expected demand patterns), and the price required to be profitable only be being turned on in such limited occasions.
As noted elsewhere, peakers can be profitable by producing only at a few % of their nominal capacity - they will typically required very high price peaks (2 to 10 times more than normal prices). As they will suually have restricted fuel supplies, if the peaks require them to function more than normally expected, they will bid even higher to cover the need to buy gas on the paralle spot market, which will likely be strianed as well, or simply because they can get away with it (the risk for them is that prices get high enough that demand destructions mechansims enter, such as interruptible contracts, or big industrial users which decide to re-sell their power rather than use it for their needs). In the long run, we're all dead. John Maynard Keynes
