Latest New England Capacity Market Mess Shows Fantasy of "Texas-Style" Capacity Market
November 25, 2013 Email This Story Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • firstname.lastname@example.org
During yesterday's hearing at the Texas Senate, Donna Nelson, Chair of the Public Utility Commission of Texas, and PUCT Commissioner Brandy Marty both emphasized that, if Texas ultimately adopted a capacity mandate, the design would be unique to Texas.
Yesterday we received more evidence of this inevitability, as ISO New England has formally announced (click here) an intent to renege on a fundamental design of its capacity market as reached through a stakeholder settlement -- the vertical demand curve -- in favor of the downward sloping demand curve preferred by generators (because it supports higher capacity prices).
ISO-NE was the only forward capacity market with a significant base of restructured state electric markets that relied on a vertical demand curve for capacity (MISO relies on a vertical demand curve as well, but the only truly restructured state there is Illinois), so ISO-NE moving to the downward sloping demand curve is another victory for homogeneity in capacity market design.
Despite originally agreeing to the ISO-NE vertical demand curve, capacity owners have been attacking the vertical demand curve almost since its inception, rather than respecting the unique attributes of the ISO-NE market, and they are instead driving ISO-NE to a "PJM-style" market.
On the same day ISO-NE made its filing at FERC, reply briefs were also submitted at FERC concerning aspects of the MISO capacity market, particularly the use of a price floor for capacity bids. As they have done in New York, PJM, and New England, capacity owners continue to press for a minimum offer price in MISO to inflate capacity prices. Each of the RTOs originally had unique minimum offer price provisions, but again, capacity owners don't respect unique market designs, and instead want the same margin-driving design in all markets.
So when Texas regulators say they'll adopt a capacity mechanism unique to Texas, don't expect it to last. The day after it's approved, expect the grumbling to begin that capacity prices under the "Texas model" are insufficient to support new generation -- just as capacity owners now claim energy prices are insufficient.
The Northeast capacity market experience, as well as the current energy-only versus capacity market debate in Texas, shows that capacity owners have a clear record of being dissatisfied with low prices and using administrative market design changes -- not competitive forces -- to increase their revenues. Texas can adopt the most innovative and fair capacity mechanism in the world, but it won't last. Capacity owners will see to that.
And Texas regulators have already blinked once when it has come to dire predictions about inadequate investment, with a majority all but prepared to jettison the energy-only market, despite a clear record of a working market for over 14 years. Do we really think some untested, unproven, and unique-to-Texas capacity market design will survive its initial two or three years if capacity owners allege investment signals are still insufficient, when all other markets in the country have adopted a much different capacity market design (it's the same refrain they're now making in deriding the unique Texas energy-only market, because everyone else is doing something different, so Texas can't be an "outlier" if it wants investment)