A load pocket is an area of electric grid (typically small) that has limited ability to import electricity due to either very high concentration of demand or insufficient transmission capabilities[1] (transmission congestion) and therefore cannot be entirely provided with power without participation of local electricity generation providers. A typical load pocket includes a major city (e.g., New York City, San Francisco, San Diego in the US). Load pocket's existence usually indicates difficulties with building of either new generation or new transmission, or both due to the area constraints or political pressure[2] and despite the pocket being an attractive place for investment (market congestion pricing strongly incentivizes new generation inside the pocket).[1] The load pockets represent a problem for the deregulated electricity markets, as in the absence of regulation the captive customers are forced to accept the prices set by the local providers.[3]
In the restructured electricity markets load pockets create a new problem absent in the "traditional" (vertically integrated) electricity markets: maintaining enough transmission/generation capacity for a competitive market to work is prohibitively inefficient,[4] so local generators might gain oligopolic market power and ability control prices, especially at peak load or during an outage at a large generation facility.[5] This makes withholding capacity to artificially create an electricity shortage rational, forcing introduction of price caps[5] by the regulation authority. The caps in turn can create a missing money problem.[6]
Load pockets provide good examples of market friction:[2]
Load pockets also create reliability concerns.[1]
An extremely simplified example can be used to illustrate the need to compensate the providers in the load pocket beyond the level defined by the wide market pricing:[3]
Under these conditions, the north is a load pocket; an attempt to create a separate market for it would fail due to monopolistic power the local provider would have, while sweeping both north and south into a single market will cause this market to clear at the price that does not cover the operating costs in the north. Therefore, some mechanism of compensation for the north's generator that does not depend on the market price is required.[3]
"Reliability Must Run" (RMR) contracts were created as a tool to temporarily keep an ageing plant in operation in a case it is needed for the reliability reasons despite its high operating costs. RMR is a relatively long-term contract (a year or more) between an independent system operator (ISO) and the generator to produce electricity with a cost-plus pricing. RMRs are used to compensate the incumbent providers in the load pockets.[4]
In addition to the price caps and RMRs, the system operators deal with the load pocket problems through a combination of different approaches:[7]