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Texas Wants to Copy This? FERC to Hold Technical Conference on Capacity Markets

June 18, 2013

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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

Listening to capacity market advocates in Texas, you'd expect that the centralized capacity markets in the eastern RTOs are "settled" market designs, which can easily be taken "off the shelf" and quickly applied to ERCOT, with little controversy or administrative bureaucracy.

Such, apparently, is not the case, as FERC does not devote technical conferences to "settled" market designs, and has just scheduled a technical conference on centralized capacity markets in RTOs.

"The purpose of the technical conference is to consider how current centralized capacity market rules and structures are supporting the procurement and retention of resources necessary to meet future reliability and operational needs," FERC said. Note the emphasis on "operational needs" -- a departure from pure installed capacity (resource adequacy) and one which has large implications for Texas as noted below

"Since their establishment, centralized capacity markets have continued to evolve. Meanwhile, the mix of resources is also evolving in response to changing market conditions, including low natural gas prices, state and federal policies encouraging the entry of renewable resources and other specific technologies, and the retirement of aging generation resources. This changing resource mix may result in future reliability and operational needs that are different than those of the past," FERC noted.

"In addition, some states have pursued individual resource adequacy policies to ensure the development of new resources in particular areas or with particular characteristics, and questions have been raised as to how those individual policies can be accommodated in centralized capacity markets," FERC said.

"The Commission has addressed a number of these issues in specific cases, based on the facts and circumstances presented in a given case and the particular centralized capacity market design implemented by individual regions. This technical conference will provide an opportunity to review at a high level the centralized capacity market rules and structures, and will examine how these markets are accomplishing their intended goals and objectives through a competitive, market-based process. Recognizing and respecting differences across the markets, the technical conference will focus on the goals and objectives of existing centralized capacity markets (e.g., resource adequacy, long-term price signals, fixed-cost recovery, etc.) and examine how specific design elements are accomplishing existing and emerging goals and objectives (e.g., forward period, commitment period, product definition and specificity, market power mitigation, etc.)," FERC said.

In short, even if Texas entertained the fantasy of capacity markets advocated by certain generators, it would need to face harsh questions which seriously challenge the notion that any existing capacity market design is workable in Texas.

If the Texas government is going to get into dictating capacity demand and resource adequacy (and not allow true market forces to achieve the most efficient and lowest cost result), the most notable issue is the challenge of ensuring the "right" kind of capacity -- meaning ensuring enough flexibility capacity that can respond under various dispatch conditions and meet operational needs, particularly given the state's high penetration of intermittent resources. Ironically, it was concerns over reserve adequacy (not installed capacity) and revenue adequacy, to support quick-start generation needed to firm wind, which started Texas' current review of resource adequacy.

California (outside of a forward, centralized capacity market) is the only state moving forward to address this question, and the current centralized capacity market designs do nothing to meet specific capacity requirements in terms of resource type (such needs are apparently left to the energy and ancillaries markets, which Texas can do without resorting to a capacity market). While the problem of intermittent resource integration could obviously just be addressed by instituting a wildly high reserve margin, that's like using a hammer to swat a fly, and simply raises customer rates when what is needed isn't installed capacity, but only discrete types of capacity for operational needs.

This also returns us to the central question of capacity markets (apart from the gating question of their benefits), which is, if load is compelled to buy capacity, is all capacity "fungible?" Despite all existing RTO capacity markets answering this question in the affirmative, when it comes to end-users, as can be seen with the need for flexible resources, the answer is clearly "no," but no capacity market recognizes this.

Furthermore, debate continues in the eastern capacity markets regarding whether certain generators (new entrants) should be able to receive additional forward pricing versus existing units, again leaving Texas a hotly contested issue that has by no means a simple answer or any "settled" policy.

FERC's technical conference will be held September 25.

Docket AD13-7

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