Electricity Markets

How a minimum offer price rule causes higher prices and reduces competition

Let’s say a public power utility is planning to retire a plant and needs a new generation source to replace this supply. The utility decides to sign a long-term contract to purchase power from a new wind farm. Because of the minimum offer price rule, a complex and anti-competitive provision in some of the capacity markets, that utility could be required to pay twice for that power.

In certain regional transmission organizations, the utility must offer the wind farm into a capacity auction when it will begin operating.  If a utility does not have enough owned or contracted capacity to meet its peak demand plus a reserve, then it must purchase additional capacity from auctions held by the regional transmission organizations. Some RTOs require all capacity to be offered into the auction.

Cost impacts MOPR vs no MOPR

Capacity purchases in example utility, MOPR vs no MOPR

In this case, the MOPR has led to wasted money, excess procurement, and increased prices for all capacity in the auction.

Infographic explaining the minimum offer price rule