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Alternatives to Texas Capacity Auction? Many Superior & Viable Options Exist, But Don't Bet on Them

October 28, 2013

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

With a majority of the Public Utility Commission of Texas agreeing that the reserve margin in ERCOT should be a mandate, the question immediately implicated is the mechanism to achieve the mandate.

Though no decision has yet been made, the inescapable conclusion -- just from the Commission's action to date -- is that a centralized (and likely forward) capacity market will be adopted, sooner or later.

Why is this conclusion so readily apparent, even as the Commissioners explicitly said that they would await the Brattle economically optimal reserve margin report before adjudicating a mechanism, and Commissioner Brandy Marty voiced support for a "unique" approach?

Because even if Texas does adopt a novel and superior resource adequacy solution, its retreat from the energy-only market despite an utter lack of evidence that energy-only is leading to realized shortfalls means that all capacity owners have to do is complain loud and long enough about any solution that falls short of the desired capacity market design, and the Texas Commission will bow to their demands.

After all, if the Commission is going to repudiate over a decade of experience of the energy-only market achieving resource adequacy (not a single RA shortage has been experienced to date that would have been solved by making the reserve margin a mandate), as well as it own findings and precedent from its 2006 order in Docket 31972, based solely on speculative and self-serving warnings of blackouts and citations to out-year shortages that have been a part of the energy-only design since its inception (and which have never come to pass as the market has responded), then it is easy to see that any alternative to a centralized, forward capacity market adopted by the Commission -- no matter how successful in achieving resource adequacy and no matter how much it saves customers -- will inevitably suffer the same fate as the energy-only market.

It may take a few years, but you can be assured that if the Commission does adopt a novel or uniquely Texas approach to resource adequacy, it won't last. Expect the grumbling that it isn't providing "certainty" or adequate compensation to investors, and isn't assuring new capacity, to begin immediately, and to grow more shrill every year.

We've been covering the Texas market since 2005. In that time, there have been two constants. The energy-only market has always achieved resource adequacy equal to a mandated reserve margin (the two rotating outages would not have been avoided if the target reserve margin had been a mandate); and despite this success generators each year say it won't continue to do so.

In supporting a mandated reserve margin, Marty said that, "I don't think that there's a single model that exists today that will fit Texas."

"Texas is unique, and whatever we should build around that [mandated reserve margin] I think would be unique," Marty said.

Continuing, Marty said, "I think that whatever this Commission would build out would be unique, and my hope would be that it would be similar to the market that we've operated under for the last 10 years."

Of course, while similarity to the energy market may seem desirable (particularly an emphasis on performance), some of the worst aspects of centralized capacity markets are also similar to the energy market -- namely the single clearing price and "non-discriminatory" treatment of suppliers. Such policies make sense in a free market, with no administrative determination of demand, where margin is needed to incent new entry. However, in a capacity market, new entry is a function of the mandated reserve margin; there is no need to further incent entry by allowing inframarginal capacity revenues. Moreover, since the point of the capacity market is, ostensibly, to provide "missing money," it makes little economic sense to provide anything in excess of the missing money to each specific generator.

Concerns that Texas is on an inevitable path to a centralized capacity market weren't allayed by Chairman Donna Nelson's proposed list of questions to be issued for stakeholder comment to develop potential mechanisms to achieve the mandated reserve margin.

Among the queries proposed by Nelson included questions on whether there should be a Minimum Offer Price Rule, and whether a vertical or sloped demand curve should be adopted -- issues fairly specific to a centralized capacity market or similar structure. Nelson's complete list of questions is below.

Commissioner Kenneth Anderson noted that there are other alternatives, including those cited by Brattle (non-centralized obligation placed on load serving entities, backstop procurement, etc.), but observed that none of the Chairman's questions addressed specific aspects of these designs, in the way that specific questions about a capacity market design were asked.

Nelson responded that such alternatives were the subject of prior comments, which they were, but so was the capacity market, which was Brattle Option 5. Neither the load obligation nor backstop procurement received any greater attention than the Brattle capacity market option; therefore, if one of those alternatives required supplemental stakeholder comment on specific issues as indicated by Nelson's questions, it is fair to wonder why other options did not warrant similar supplemental comment on more granular issues.

Additionally, there have been other resource adequacy proposals offered by stakeholders (such as TIEC) which have been addressed to an even smaller extent, but these also were not specifically cited by the Chairman in her proposed questions.

The Commission elected to await input from Anderson and Marty prior to issuing any questions for supplemental comment, with such questions likely to be issued at the next open meeting.

In the coming weeks, Matters will review a number of alternatives which would achieve the mandated reserve margin at a lower cost than existing centralized capacity market designs. However, despite the Commission's ostensible openness to considering alternatives, we see any alternative, no matter how superior and beneficial to customers, consigned to the same fate as energy-only, because the Commission has just shown that capacity owners only have to yell "Fire" for the Commission to alter its successful market design in the name of "keeping the lights on."

Nelson's list of questions regarding "Elements of a Reliability Market" proposed for stakeholder comment were:

1. What resources should be allowed to participate in the market?

2. How far forward should the procurement occur? What are the trade-offs of different forward procurement times?

3. What qualification, performance requirements, and penalties should be in place for resources?

4. Should there be a locational reliability requirement in ERCOT? If so, what factors would dictate separate locational requirements?

5. Should a transition mechanism be considered? If so, what issues would a transition mechanism be intended to address and how should it be structured?

6. Should the Commission consider a Minimum Offer Price Rule (MOPR) or a statement of principles?

7. How would the reliability obligation be allocated to load serving entities?

8. If the market includes a centralized or residual auction, how should the auction be structured?

9. If the market allows for self-provision, how should that be structured?

10. Should a vertical or sloped demand curve be adopted?

11. What additional elements of a reliability market design should be considered?

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