6.3. ERMUSR 06-14-2005 - Laserfiche WebLink

Home Browse Search

that a new generator would be fully compensated and earn a fair return. The logic for marginal, system-critical resources is the same: The few high- priced hours when these units are dis- patchedwill provide enough compensa- tion to cover going-forward costs and keep the units from retiring. The other option, of course, is to couple a capacity mazket with the energy market. PJM, ISO New Eng- land, the New York ISO (NY--ISO), and others have used'vaziants of this theme fairly successfully. Energy-plus-capacity markets generally function by compen- sating generators based on total installed, or available, capaciryZ Genera- tors receive a payment that supplements revenues earned in the other markets. The idea is that total revenues should be sufficient to cover going-forward costs at a level that is compazable to what generators eazn from hourly dis- patch in an energy-only market. Bumps fn the Road As deregulated markets collect a histori- cal record that includes the experience of a full boom-bust business rycle, sev- eral shortcomings in existing markets are becoming apparent. For NoCAP markets, it is the institution of price caps that is arguably the most notable contributor to their inability to provide a stable and sufficient revenue stream to generators. Others with capacity maz- kets in place are finding that simply adding generic capacity resources some- wherewithin the market footprint may not be the optimal path to ensuring resource adequacy What started as sim- ply aquestion of how much, has re- cently matured to a question of what, where, and when. Price Caps. In U.S. energy markets, extreme price volatility is unpalatable to the general public. As a reaction to high prices in the Midwest in 1998, PJM in 1999, and California in 2000, many www.fortnightly.com markets created price ceilings (or price caps) to protect the public from extreme energy price volatility. But the problem with this type of protection is that it sac- rifices the prospect oflong-term market stability for the sake ofavoiding adam- agingsummer newspaper headline. This is especially true in NoCAP markets. Marginal generators in NoCAP markets are dependent on the few days when the intrinsically volatile energy mazkets deliver high-priced hours. The ability to capture revenues during these high jpriced times gives mazginal generators the ability to cap- ture a sttfficient level of revenues. But, with price caps in place, generators lose this revenue which tends to dampen the new build signal and undermine the ability of system-critical resources to capture adequate revenues. Location. Many have begun to rec- ognize that the regional diversity of the geographic footprint covered by power pools is such that they need to worry about where generators are encouraged to btuld. Given the constraints of the transmission system, it is critical that new generation be located as close to load as possible. For example, building new generation in western Massachu- setts does not solve the supply situation in southwestern Connecticut. In single-price capacity markets, there is no incentive or price signal pro- vided by the capacity market that encourages new generation to build in an area that benefits the grid. Differ- ences in locational marginal pricing (LMP) encourage generators to build closer to higher-priced locations, but this does not provide enough benefit to marginal generators. .The shortcoming ofnon-location- allybased capacity markets can be wit- nessed in part by the need for many markets to continue to maintain relia- bilirymust run (RMR) programs. RMR payments are designe to com- pensate system-critical resources that are needed to maintain system reliabil- ity. These resources are often older units that run infrequently due to inefficient, out-moded equipment with high heat races. In many cases, these units would not cover their going-forward costs and would be retired if they didn't receive additional monetary support From RMR payments. For example, units like El Segundo on the beach in Los Angeles or Devon on the coast of Connecticut are needed to maintain system reliability. In those areas it is very difficult to site new transmission lines, and probably impossible to site a new power plant anywhere near El Segundo, so the system needs to ensure that these units earn sufficient revenues to keep them from retiring. V~'ithout a capacity market that provides additional compensation for these generators (or more modern substitutes), the power pool must continue to prop them up with administrative RMR payments. Operating (and Fuel) Diversity. In addition to issues surrounding location, questions have been raised about the ability of capacity markets to address the operating profile of new equip- ment. The argument is that even if you get enough capacity at the right place, you still need to worry about the type of equipment that is built. The system needs resources that have operating flexibility and also contribute to the fuel diversity of the overall fleet. The "dash-for-gas" witnessed in the recent past created a glut of homoge- nous units. One problem that has sur- faced as a result of this monolithic block of capacity is that supply is very depend- ent on gas prices. Given the correlation of gas prices to heating needs in winter, regions have seen shortages and price spikes when gas-fired generators sold gas into the heating market rather then gen- erating electricity. Inaddition, many of the units have similar operating chazac- Mav 2005 Pueuc Ununes Foerxiexnr 25