Electricity Markets

New report demonstrates case for reform to capacity markets

A new white paper, Mandatory Capacity ‘Markets’ and the Need for Reform, shows how recent developments in PJM Interconnection, ISO-New England, and the New York ISO demonstrate an urgent need for reform of the capacity constructs used in these regions.

The American Public Power Association commissioned the report from Wilkinson Barker Knauer, a law firm with a specialty practice in energy, to document the extent to which policy actions in these regions has exacerbated what it sees as fundamental flaws in the design of mandatory capacity markets. The paper shows how an increase in state resource procurement and the resulting series of complex rule changes by the Eastern RTOs and the Federal Energy Regulatory Commission have increasingly impeded both state energy policies and the ability of public power and cooperative utilities to self-supply.

The authors list several actions that have underscored these flaws, which include:

  • The inability of capacity auctions to differentiate between each megawatt of capacity, making it difficult for states to procure a specific technology type or attribute, such as renewable resources, to meet specific policy goals.
  • Complex rules and frequent changes to such rules that create uncertainty for state and public power resource planning and procurement.
  • The expansion of the minimum offer price rule (MOPR) and similar types of buyer-side mitigation, which places resources at risk of not clearing auction, which in turn means utilities may have to pay twice for capacity – once for the resource that didn’t clear the auction and a second time to procure  needed capacity.
  • Inefficiencies in resource procurement and development resulting from the purchase of excess capacity through the capacity auctions.
  • Highly volatile short-term revenue streams that are not well suited for long-term financing of new generation.
  • The short-term and volatile nature of these constructs has proliferated merchant-funded generation, comprised almost entirely of natural gas-fired resources, which in turn has reduced resource diversity and created a set of merchant resources dependent upon market revenues.

“Mandatory capacity constructs are dysfunctional, and a major cause of the disintegration of regional ‘markets.’ We have previously addressed state ‘around market’ actions and, most recently with the PJM Capacity Market Order, FERC itself deciding to create a ‘super-MOPR,’” said co-authors Ray Gifford and Matt Larson of Wilkinson Barker Knauer LLP. “We also realize throwing rocks is easy. We need to have a conversation around real reform ideas – this paper is a way to start that conversation.”

In addition to laying out the concerns with recent developments in the Eastern RTOs, the white paper’s critique is also intended to deter policymakers and stakeholders from considering similar mandatory models in other regions.

Renewed call for reform

The paper underscores APPA’s long-standing call for fundamental reform of the mandatory capacity markets within the regional transmission organizations and independent system operators.

APPA advocates for two fundamental reforms: 1) competitive capacity procurement that does not include any buyer-side mitigation, such as a MOPR; and 2) a transition to a voluntary residual capacity market.

With these reforms, APPA would expect two critical outcomes:

  • States would be able to choose whether or not to engage in more comprehensive and coordinated resource planning with investor-owned utilities without impediments from the RTO/ISO rules.
  • Public power and cooperative utilities within RTO/ISOs would meet their resource adequacy obligations through mechanisms of their choice, including bilateral contracts, ownership, or procurement through the voluntary residual capacity market.

The paper notes that such reforms would not change the fact that load-serving entities are subject to resource adequacy requirements and could still be fined for failure to meet those requirements.

“The time is ripe for fundamental reform,” said Elise Caplan, director of electric markets analysis at the American Public Power Association. “States and local utilities’ generating resource decisions are being increasingly impeded by the RTO/ISO markets. All consumers would benefit from a more stable and less complex framework for resource planning and procurement.”

“These proposed reforms would benefit public power by removing self-supply impediments and reducing price and market rule volatility,” she said. “Such reforms would also benefit consumers, states, integrated utilities and other stakeholders by shifting the paradigm of resource adequacy procurement to one that can achieve multiple policy goals, mitigate cost increases, reduce price and rule volatility and guard against excess procurement.”

The paper also recommends that the restructured states undertake resource planning in a more comprehensive manner to accompany the move away from mandatory capacity markets. But it recommends that states determine their path forward and does not recommend any FERC action with regard to these state choices. The paper discusses several options for states to consider.

The paper asserts that the energy markets are generally working well and efficiently dispatching resources, and APPA affirmed that it does not suggest reforming these markets at this time.

According to the paper, both state and public power resource procurements are driven by a variety of policy goals that do not rely on the capacity constructs, including fuel diversity and security, emissions reductions, flexibility, economic development, and reliability needs.