FERC staff report outlines challenges facing RTO capacity markets
Originally published August 29, 2013
A white paper by Federal Energy Regulatory Commission staff outlines the challenges facing the centralized capacity markets of the three Eastern regional transmission operators and looks at their differing approaches to five common design elements of the markets. The report, "Centralized Capacity Market Design Elements," notes that the capacity markets run by PJM, the New York ISO and ISO-New England face new challenges in meeting their goals as the mix of available resources changes in response to market conditions and state and federal policy changes. "In deciding how to address these challenges, multiple and sometimes competing policy objectives will need to be weighed."
Some state policymakers and other stakeholders "are asking if the current capacity markets accommodate state policy goals like renewable portfolio standards or integrated resource planning requirements," the staff report said. "The capacity product procured by the current capacity markets generally does not reflect such goals."
The report discusses the ongoing conflict between state energy policies and the RTOs’ use of minimum offer price rules (MOPR) to ensure capacity market prices aren’t lowered by subsidized generation bidding into the capacity markets, regardless of the intent of the bidder. "The issue of whether intent is relevant has come up in applying MOPR-type mitigation to certain types of new capacity resources of interest to state policymakers to achieve energy policy goals, such as the procurement of new renewable resources under a renewable portfolio standard or the procurement of local capacity resources with particular attributes," the report said. "Similar concerns have been raised regarding the application of MOPR-type mitigation to a resource that is self-supplied by a load-serving entity."
"As specific types of resources continue to be constructed to meet increasing renewable portfolio standards or other policy goals, the tension between the goal of promoting competitive new entry through buyer-side market power mitigation measures and accommodating state energy policy goals is likely to continue," the staff report said.
Consideration of intent is a given in deciding whether to mitigate supply-side market power, the report indicates. If supply-side market power mitigation mechanisms "are not carefully designed to focus on suppliers with both the intent and the ability to raise market prices above competitive levels, there is a risk of excessive mitigation that could artificially dampen market clearing prices and detract from the ability of the market to attract and retain resources and ensure just and reasonable rates," the report said.
The report, which was released in preparation for the commission’s Sept. 25 technical conference on the capacity markets, examines five design elements: demand curves; forward and commitment periods; definition of the capacity product; performance requirements; and market power mitigation. The report is posted on the commission’s website.
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