Authors: Sharon Theodore, senior director, regulatory affairs and Brian George, director, strategic policy and government affairs
As federal energy regulators look to modernize wholesale electricity markets, sound capacity market principles will build a reliable, more affordable and sustainable power grid.
Next week, the Federal Energy Regulatory Commission (FERC) will hold the first of a series of technical conferences to examine modernizing wholesale electric market design. FERC’s conference taps in to a critical conversation about how the U.S. can encourage companies to build reliable and affordable electricity generation while transitioning to a lower-carbon, even more efficient and resilient grid – by leveraging competitive power markets that have to date delivered billions in cost savings, ushered in new, cleaner and more efficient technology and renewables, and reduced emissions.
The initial conference will examine capacity markets run by the Eastern independent grid operators – ISO New England, New York ISO, and PJM Interconnection – with a particular focus on the PJM capacity market. Subsequent conferences may further examine the other ISO/RTO capacity markets, and will also consider the energy and ancillary services markets.
EPSA’s Recommendations: Build on a Solid Foundation
EPSA believes that any such examination should consider design changes within a short-to-medium timeframe (2-5 years) and a longer-term market design evolution (over the next 10 years). Fundamentally, the existing three market structure – capacity, energy and ancillary services – provides a solid foundation for the transition to a decarbonized electric grid. Any changes should therefore be considered holistically across the markets.
A critical starting point in the evaluation of capacity markets will be the minimum offer price rule (MOPR), which has been a central element of capacity markets since their inception – and more recently, a point of contention. To ensure competitive outcomes in capacity markets, market power mitigation mechanisms to protect against both buyer-side and seller-side market power will continue to remain important.
Views of the FERC Commissioners: Delayed Capacity Auction Must Run
Chairman Glick and the Commissioners have clearly expressed support for a broader dialogue with all stakeholders to evaluate capacity markets, MOPR and the tension with state public policies and FERC-jurisdictional wholesale electric markets, including both new Commissioners Allison Clements and Mark Christie.
At the same time, there has been a recognition from Chairman Glick and the Commissioners that it is important to proceed with the long-delayed PJM capacity auction cycle. Of note, Commissioner Chatterjee has emphasized that revisions to PJM’s capacity market and mitigation rules must be approached in a holistic, deliberate manner that does not interrupt the upcoming auction schedule or undermine investment certainty.
Focus on Resource Adequacy at The Regional and State Level
In addition to the FERC dialogue, a number of efforts are currently underway – at different stages – at the regional and state level to consider resource adequacy issues and possible capacity market enhancements. PJM is holding a series of capacity market workshops this month that may lead to a formal stakeholder process, and in the Fall of 2020, the New England states announced their Energy Vision initiative that calls for reforms to the ISO New England markets, including reliance on market-based approaches for resource adequacy and to meet state public policies. In 2019, the New York Public Service Commission initiated a proceeding to examine resource adequacy matters in the New York ISO installed capacity market (ICAP), and a review is ongoing in New Jersey to examine how the state can best achieve its long-term clean energy and environmental objectives under the current resource adequacy paradigm. California and MISO are also considering resource adequacy market enhancements.
We welcome these long-overdue conversations. As the FERC and regional discussions proceed, we have developed several guiding principles on capacity markets for consideration.
Guiding Principles for Capacity Markets
- In lieu of state-level integrated resource planning or an energy-only market, regional capacity markets utilize pre-determined reliability targets to procure the lowest cost set of resources to meet regional resource adequacy needs. A forward capacity market, which provides needed revenue to resources that may seldom run but are needed during extreme conditions, has been a highly successful regional resource adequacy tool to maintain grid reliability and is an efficient, cost effective, and durable mechanism for integrating the evolving resource mix.
- To address state policy goals, capacity markets should integrate state-preferred resources that are not procured via a competitive, market-based procurement process only when the RTO is confident that both reliability and market integrity will be adequately maintained. The capacity market must still ensure buyer-side and seller-side market power is appropriately mitigated.
- Capacity markets should not be a barrier to renewable integration; all resources should have the ability to compete based on their contribution to the reliability target regardless of how it is measured (e.g., traditional UCAP or ELCC).
- All market participants must have the opportunity to recover their investment to maintain confidence in the market and incentivize continued new development and retirement through market price signals.
- Competitive wholesale markets are the most effective tool to achieve policy objectives by encouraging private capital deployment and innovation at the lowest cost while appropriately shifting investment risk to resource developers and operators, not consumers.
- Wholesale energy markets that incorporate both environmental and reliability requirements will yield the lowest cost set of resources and technologies that jointly produce the greatest emission abatement while maintaining the highest level of reliability.
Toward Durable Market Solutions
As the process moves forward, EPSA will continue to offer input and recommendations to modernize electricity market design in a manner that delivers the best outcomes. We appreciate the Commission initiating this important dialogue and look forward to working with other stakeholders to find creative, durable market solutions that bring the benefits of competition to all Americans and achieve sustainable environmental progress.
Read EPSA’s full comments provided to PJM following its Capacity Market Workshop – Session Two.
