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Texas Industrials Eviscerate Brattle Resource Adequacy "Analysis"; Report Favoring Capacity Market Called "Misleading," "Anti-Market"
October 24, 2012
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Copyright 2010-
The Brattle Group presentation on "composite" resource adequacy alternatives filed with the Public Utility Commission of Texas on October 19, 2012, "does not accurately capture or meaningfully evaluate the various stakeholder proposals that support an energy-only market, including the backstop demand response procurement proposal offered by Texas Industrial Energy Consumers," TIEC said in scathing comments on the Brattle report.
"Instead, the Brattle Presentation appears to be a result-oriented exercise that begins with the false assumptions that a forward capacity market will guarantee a certain level of reliability and can be quickly implemented without complication, while assuming that an energy-only market that maintains adequate reliability is not achievable -- even with what Brattle calls the 'best' backstop it could design," TIEC said.
"This apparent bias, which is unsupported by any empirical data, pervades the Brattle Presentation," TIEC said.
"Despite acknowledging that an energy-only market is the most efficient market design, Brattle's analysis gives little attention to options that would maintain the long-term goal of creating a sustainable, reliable, efficient competitive energy-only market," TIEC said.
Accordingly, the Brattle report, "fails to provide the Commission with a balanced and well-reasoned analysis of the various market design options for ensuring resource adequacy," TIEC said.
Specifically, TIEC noted that the Brattle composite of the Energy-Only with Administrative Support alternative, "does not appear to procure only the projected shortfall between a target reserve margin and actual reserves for the upcoming summer [as proposed by TIEC], which TIEC believes will be a limited or non-existent shortfall based on current market data."
"Similarly, Brattle's 'composite' does not appear to envision that this demand response will transition to the market once it is implemented and enabled, as TIEC proposes. TIEC's proposal was intended to be a bridge to what Brattle admits is the ultimate and most desirable end state: a pure energy-only market with sufficient price-responsive demand," TIEC said.
"This is in stark contrast to the anti-market approach that Brattle now appears to think is the proper choice for Texas," TIEC said.
"The TIEC demand response backstop proposal would only procure additional demand response resources as needed to meet a projected reserve shortfall for the upcoming year. The suggestion that this type of backstop would need to produce 3,500 MW of additional demand response resources starting in 2016 [as Brattle suggests] is simply not borne out by the evidence," TIEC said.
In particular, TIEC demolished Brattle's "faulty" presumption that the current energy-only market will produce an equilibrium reserve margin of 8%.
"Despite historical CDR projections that have consistently predicted that reserves would fall below the target reserve margin two to three years in the future, the actual reserve margin in ERCOT has never dropped below 13.75% since competition began, and has never been anywhere near 8%. Once again, despite dire predictions last year, the CDR update filed by ERCOT on October 22, 2012 now indicates that there will be reserves sufficient to meet ERCOT's target well into the future," TIEC said.
As more fully covered in a related story today, TIEC found that with updated load forecasts and the inclusion of mothballed capacity, ERCOT is projected to be above or at the reserve margin through 2017 (click for story)
Given these findings, TIEC noted that its demand response backstop procurement would not be needed at all until 2017 at the earliest. "This gives the market several years to develop additional market-based, price-responsive demand, making the need to conduct any backstop procurement even less likely," TIEC said.
TIEC also took issue with Brattle's recommendation to maintain high energy price caps if a capacity market is implemented.
"[A]dding a capacity market and then advocating to continue high energy prices (with the potential for very high scarcity prices) is a 'heads I win, tails you lose' construct that will ultimately harm consumers. Under this approach, there is simply no guarantee that customers will save on capacity payments when energy costs are high, or vice versa. Instead, there is a real risk that customers will simultaneously be saddled with high capacity costs and high energy costs. Many observers have identified this as a structural problem with forward capacity markets. Despite Brattle's purely academic cost assumptions based on 'long-term equilibrium,' it is simply not the case that markets will be at their long-term equilibrium at all times, nor is it the case that all markets will cost the same over time," TIEC said.
"As just one example, not all 'disequilibrium' is caused by a mismatch in expected loads and resources that creates unforeseen scarcity. Disequilibrium can just as easily be created when market conditions change between the time that government-mandated purchases of future capacity occur, and the time that the capacity is actually made available and the capacity payments are actually made. To illustrate, assume that capacity bids are entered in the capacity auction when natural gas prices are projected to be $4/MMbtu for the delivery year. If, between the auction year and the delivery year, gas prices rise to $12/MMbtu, customers will be paying significantly higher energy costs during the delivery year than were expected. Yet customers will still pay capacity payments that were premised on lower energy market revenues (due to the expectation of lower gas prices). This example demonstrates why the additional costs under a capacity market design may be substantially higher in many years than the 'average long-term equilibrium,'" TIEC said.
TIEC thus called Brattle's cost analysis of a capacity market, "understated and misleading."
Furthermore, TIEC said that the implementation risks and design complexity of a capacity market are "significantly understated" by Brattle.
"Despite devoting more than 10 pages of relatively small typeface just identifying the high-level 'design elements' of a forward capacity market, the Brattle Presentation touches only the tip of the iceberg on implementation issues. Each and every aspect of a forward capacity auction must be administratively determined, leading to contentious stakeholder debates, regulatory decisions, and subsequent litigation, as demonstrated by the experience in PJM. There are approximately 50 separate, voluminous documents governing the PJM capacity auctions. Even assuming that the MOPR [minimum offer price rule] and locational capacity markets are not created this would only reduce the number of governing documents by four," TIEC said.
TIEC noted that a few of the administrative decisions that would have to be made include:
• Setting the administrative Cost of New Entry (CONE)
• Determining the slope of the demand curve
• Determining the relative capacity value for all generation types
• Creating must-offer rules for the energy market
• Setting offer caps and administrative pricing parameters for the energy market
• Determining cost allocation of capacity payments
• Addressing participation of municipally owned utilities and electric cooperatives
• Setting penalties for non-performance
• Developing rules to address market power in the capacity auctions
• Determining the forward procurement period
"Each of these inputs for the capacity auction will involve contentious and lengthy debate among stakeholders and policy makers. The results of capacity auctions are also extremely sensitive to these inputs, and miscalculations in these parameters can cost customers billions of dollars, leading to endless controversy and uncertainty. The Brattle Presentation simply assumes that this can all be overcome efficiently and quickly. This is unrealistic and contradicted by real-world experience," TIEC said.
"TIEC supports and believes in ERCOT's energy-only market. Experience has proven that true competitive markets are more efficient and better-equipped to make long-term investment decisions than government-prescribed administrative processes. The existing energy-only market design has met the target reserve margin year after year and, based on ERCOT's updated CDR analysis from October 22, 2012, continues to provide the desired level of reserves," TIEC said.
"If the refinements recommended in the Brattle Report are implemented, such as more efficient scarcity pricing and a proxy demand curve, there is simply no reason to believe that the energy-only market will somehow cease to produce sufficient generation as it consistently has in the past. A properly structured backstop procurement process, like TIEC's proposal, would provide additional assurance for what is already a very successful and reliable market design. The Commission should conduct its own analysis of the proposals that have been made to preserve the energy-only market, and should reject proposals to move ERCOT backward toward government regulation of generation through a mandated and heavily regulated capacity market," TIEC said [emphasis added]
Copyright 2010-
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