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needed to meet system needs. So what does all this mean? In terms of market evolution, there is no reason to expect that all of these steps will be fol- lowed inorder byall markets. As experi- encebuilds and historical examples accu- mulate, it is likely that markets will level- jumpfrom NoCAP to LICAP, for in- stance, as is being considered in Califor- nia (see Table 1). Certainly, if a LICAP Plus market appears to work, we may see markets open in the future with that structure used from the beginning. Re- gardless, the current state of the various markets in the United States provides a live example of the progression of thought on how best to ensure resource adequary in deregulated markets. The outcome of the discussions under way in PJM will have a significant impact on the future form of capacity markets. PJM has been viewed for some time as a model market, so others likely will continue to follow its lead and adopt similar market structures. In addi- tion, MISO is under order from the Federal Energy Regulatory Commission to produce a system that is consistent with PJM. Given these developments, within several years the Northeast likely will be dominated by LICAP markets, while LICAP Plus could stretch from the Mid-Atlantic to Montana. Develop- ments in California and ERCOT should add additional momentum to the LICAP model in future years. For market participants, these new structures could have material impacts, at least in the short term. For a generator in Connecticut, for example, the addi- tion of LICAP could mean the differ- encebetween less than $1 /kW-mo. in capacity compensation or $5 or $6/kW- mo. For a generic 600-MW combined- rycleplant, this could add $40 million per year in revenues. To put this in per- spective, anadditional $40 million would increase gross margins from 15 to 40 percent for this typical plant, which I Market Current Future Comment Capacity Market Capacity Market CA None (energy-only) ICAP/LICAP Market Design 2002 (MD02) includes an Available Capacity (ACAP) market that will function like ICAP/ UCAP markets. Also considering adding a LICAP component. ERCOT None (energy-only) Under Discussion Considering various capacity market options as part of overall market overhaul. MISO None (energy-only) LICAP Plus Under FERC order to design a resource adequacy scheme that is consistent with current (and future) PJM system. Started market April 7 without capacity market NY ISO LICAP` No Change New York is a three-zone LICAP market with demand curve. Pricing zones for New York City, Long Island and Rest of State. ISO NE ICAP' LICAP Moving to a 5 zone LICAP market with demand curve, Wiil look a lot like New York. PJM ICAP' LICAP Plus In prtx~ss of designing a new Reliability Pricing Model that will include price adders for location and operating flexibility. Also considering adding a demand curve. 1. Markets calculated based on unforced capacity availability which adJusts available capacity to reflect forced outages. Referred to as ICAP markets that utll¢e UCAP calculation methodology. goes a long way toward covering debt service on struggling merchant plants.] For plants in other parts of NEPOOL, the shift will be less dramatic or perhaps even nonexistent. A plant in the pro- posed "Rest-of--Pool" zone will see little, if any, price appreciation. While price shifts in tight locations like southwest Connecticut and eastern PJM may help struggling generators in the short term, they are unlikely to per- sist over the long term. There are essen- tially three outcomes for the revised markets, all of which should lead to prices that trend toward the mean. First, if the markets function as intended, high prices in load pockets will attract new resources that will alle- viate the shortage and bring the zone back into equilibrium. This will serve to drive prices down in this region over a relatively short time horizon. Another possibility is that new transmission capacity will be built that alleviates constraints within a zone and allows for more import capacity. This outcome also would put the same downward pressure on prices. In fact, some are calling already for NEMA/ SWCT zonal prices in New England to converge on Rest-of--Pool prices within one year of LICAP star because of planned transmission upgrades. Finally, if a new market structure leads to sus- tained high prices for merchant genera- tors, it will be apparent that the market is not working as intended and regula- tors will be forced to reconsider the market structure due to the impact on consumers. Craig Hart is vice president with US Power Generating Co., established fo acquire and manage merchant power projects. He can be reached at chart@uspowergen.com. Endnotes 1. This categorization excludes other ancillary services including spinning reserves, regulation, black-start capability, etc. Nevertheless, it is important to note that it is the combination of energy, ancillary services, and capacity products that provides a total revenue package to gener- ators. But, since these other ancillary services do not differentiate the individual resource ade- quacy markets, a discussion of them is consid- ered out of scope of this article. 2. Many markets account for scheduled out- ages in deterrrtining unit availability. 3. Final market designs may include mecha- nisms for subtracting infra-marginal revenues when determining capacity compensation. If this is ultimately adopted, assuming all else remains equal, the more a generator earns in the energy market the less it will earn in the capacity market. ;, ~, www.fortnightly.com Mnr 2005 IMeuc Ihuntes Foettuextiv 27