Transcript Better Align Capacity Markets with Policy/Planning Objectives

Better Align Capacity Markets
with Policy/Planning Objectives
James Daly, VP Energy Supply
Restructuring Roundtable
Sept 21, 2012
Do We Need a Centralized Capacity Market ?
Total Retail & Wholesale Market Payments
20
18
$ Billion
16
14
Total Retail
12
Transmission
Energy
10
Capacity
8
Ancillaries
6
4
2
0
2006
2007
2008
2009
2010
2011
notes
(1) Total retail from EIA U.S. Energy Information Administration, State Energy Data 2010: Prices and Expenditures
(2) Transmission costs are infrastructure costs from total regional network load cost reports
(3) Energy calculated as DA LMP x DA demand + (actual load - DA demand) x RT LMP by zone summed over zones
(4) Prior to December 2006 capacity was mainly traded bilaterally and only residual needs cleared in monthly voluntary and deficiency auctions
(5) January 2007 through May 2010 from 2010 Annual Markets Report covering Transition period, June 2010 through December 2011 calculated monthly as ICR x (FCA
clearing price - PER), includes payments to HQ ICC holders
(6) Ancillaries (i.e., forward reserves, real time reserves and regulation) taken from 2006 through 2011 Annual Markets Reports
2
Capacity Markets Historically in NE
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New England has had a capacity market for decades
•
Prior to April 1998 energy and capacity was integrated
Primarily a bilateral market prior to December 2006
Load Serving Entities held capacity to meet share of the pool requirement
Buyer and seller negotiated prices for capacity
Failure to meet capacity obligations resulted in deficiency charges (base on
the cost of peaking capacity)
– Capacity payments in bundled transactions granted a call on energy
• High capacity payments associated with lower cost energy
• Low capacity payments associated with higher cost energy
3
Framework for Considering Capacity Markets
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Capacity is needed to ensure reliability
Setting a value on capacity is highly variable
–Surplus markets = low value
–Deficient markets = high value
•
Market entry and exit can take a long time
–potentially exposing customers to prolonged periods of
high or low prices
•
Magnifying dynamic in NE with generation divestiture
–Generation generally does not have load responsibility
–Load generally does not own generation
•
Polarization drives litigation
4
Emergence of Centralized Markets
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Forward Capacity Market (FCM) emerged in 2006 to be
effective June 2010
Centralized market clearing through ISO
Uniform capacity payment to all capacity
Prices set competitively between a floor and ceiling
Geared to the short term – 1year existing, 5 years for
new
Weak penalties and incentives
5
Proposed “Improvements” Called for at FERC
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Demand curves – administratively set prices based on quantity
of capacity in market
Minimum Offer Prices Rules (MOPR)
–Prices set by regulation rather than competition
–Price = long run marginal cost of resource
–Move from minimum cost capacity (peaker) to max cost
capacity (clearing technology)
–Not likely to incent new generation
• Payment duration (5 years for new) too short to
motivate capital
• Market prices volatile
• Exceptions allowed in some cases for renewables
•
Call for increase incentives and penalties
6
Proposed “Improvements” at FERC
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MOPR can lead to very large cost swings:
2010 Total NEMA / Boston Capacity Cost & Price Under Various LSR Clearing Prices
% Increase
$Million $/kW-yr ¢/kWh from Base
Base
364
48
3.0
CT (LM6000)
576
77
4.8
58
CC (2 x 1 F)
594
79
5.0
63
Biomass
894
119
7.5
146
Offshore wind 1,901
253
15.9
423
7
Bilateral Capacity Markets
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•
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Capacity obligations met primarily through bilateral markets –
buyers and sellers set price
Locational needs as warranted for the load zone
ISO sets minimum terms to qualify as capacity
• Operating parameters, ramp rates, capability
• Backup fuel and inventory requirements
• Audits performance and sets penalties/incentives
•
•
Capacity that meets minimum terms qualifies to meet load
serving entities capacity requirements
Failure to secure sufficient capacity results in deficiency charge
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Advantages of a Bilateral Capacity Market
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Allows market to set capacity prices to reflect what is being purchased
– Renewables to meet states’ environmental policy
– Reliability projects per state’s goals
– Energy rich resources for low energy costs
– Peaking resources for quick start and load following capability
•
Eliminates need for offer review trigger prices
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ISO can focus on maintaining a minimum level of reliability
– Performance penalties and incentives
– Pricing for market should be less controversial
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Load has responsibility to manage its own resources rather than relying
on a central market
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