Flexible dispatch for non-utility generators

This dissertation takes a transaction cost perspective to analyzing the long term contracts required under two approaches to the flexible dispatch of Non Utility Generators; centralized dispatch with utility control or the dual approach of decentralized spot pricing. Long term contracts under the centralized approach require a renegotiation mechanism in order to provide flexibility. The decentralized approach is inherently flexible but may have greater transaction costs and, under current industry conditions, does not eliminate the need for long term contracts.;The need for long term contracts arises because NUGs are a classic example of a specialized asset, whose sunk costs are vulnerable to appropriation by the monopsonistic utility. In a decentralized spot market the vulnerability arises not only due to market imperfections, such as monopsony and the inability to internalize the consumer's outage costs, but also due to the technology's capacity constraint that creates an upper bound on the short run marginal cost and, hence, the spot price. The vulnerability of the NUG is limited to the shortage value, which is the portion of his sunk costs in excess of this upper bound.;To achieve an optimal merit order under centralized dispatch the NUGs' energy charge to the utility must equal his marginal cost. Flexibility requires that the fixed capacity payments depend on the utility's marginal cost duration curve and need to be renegotiated when demand or supply conditions change. The equilibrium attainable with a revelation approach to renegotiation is not attainable with a simple delegation approach because the dispatch durations chosen by the utility are a function of all of the NUGs' cost reports. A revelation approach to renegotiation allows adaptation to changing loads and fuel prices. This approach is incentive compatible for small NUGs if they receive all of the surplus from renegotiation. This surplus increases with the diversity and flexibility that the NUG offers the utility and can be capitalized in an initial competitive auction providing an incentive for the development of a least cost system given uncertainty over loads and costs.