How may a generator manage the risk of PJM’s incentive scheme for capacity delivery?

Motivated by PJM’s recently proposed incentive scheme for capacity delivery during system emergencies, this paper develops two wholesale market products that a generator may use to manage the scheme’s risk. The first product is an insurance that removes the scheme’s downside risk due to the penalty for under-delivery. The second product is a forward contract that insulates a generator from the scheme’s risk due to the penalty for under-delivery and reward for over-delivery. The paper’s main contribution is how to price these newly developed products using readily available data. Copyright © 2022 Elsevier Inc.