MANY PLAYERS IN THE ELECTRIC INDUSTRY HAVE COME to believe that energy-only prices will soon replace the hundred-year tradition of pricing both energy and capacity.

This idea, sometimes called "monomic" trading, offers a seductive simplicity. Even so, research indicates that it is unlikely to work well.

First, consider some terminology. Traditional electric markets contain prices for both energy and capacity. Energy prices pertain to the actual kilowatt-hours. Capacity prices pertain to the right to take energy.

"Spark spread" sets value, but as prices diverge from system

lambda, merchant plant buyers will be flying blind.

Many power plants will be bought and sold in the next decade. Some utilities will divest power plants as required by regulators; others will sell for strategic reasons. Most of the plants sold likely will become merchant plants, with no guaranteed market for their electric output. Merchant plant activity is already significant and growing. The value of these plants will depend on how well they can perform in an uncertain market.