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Anderson Staff Analysis: CRA/NRG Study on Capacity Market "Savings" Filled with Errors, Omissions and Incorrect Assumptions
An analysis prepared for Texas Public Utility Commissioner Kenneth Anderson concludes that a study by Charles Rivers Associates commissioned by NRG Energy, which purports to show savings to gross state product from adopting a capacity market, contains numerous "errors in assumptions and calculations" as well as "incorrect assumptions and basic math errors" which inflate the cost of the energy-only market, and speciously make the capacity market option appear superior.
The analysis was prepared by Richard Wakeland, P.E., who serves as policy advisor for Commissioner Anderson.
Link to Wakeland analysis
Wakeland noted that the CRA Study, "grossly overstates the direct cost per event of electric service interruption in its evaluation of the energy market construct."
"This is the value that CRA uses in their economic model to determine the effect on the Texas gross state product. In calculating the direct cost per event, CRA ignores warnings from the authors of a referenced national study and use summer weekday afternoon cost values for every time period of the year," Wakeland noted [all emphasis in this story from original].
"Ignoring yet another warning from the same national study, CRA fails to account for a significantly higher load profile for afternoon and evening periods which also inflates their numbers. The inflation is so great that the CRA Study uses $85,000/MWh as an overall average cost per un-served MWh (or $85 per un-served kWh), for every time period of the day, season of the year, business type and residential consumer," Wakeland noted.
"Finally, CRA assumes an 8.4% reserve margin by way of incorrect assumptions and basic math errors for the energy market in 2016 to determine the total amount of un-served energy in a year, and they carry these errors throughout all years of their study," Wakeland noted.
"The net effect of these errors and omissions is to increase the cost estimate of an energy market by at least a factor of ten (likely by a factor of at least 40)," Wakeland said.
More specifically, among other things, Wakeland notes that, "CRA takes a 2016 10.4% reserve margin from the CDR and assumes it corresponds to an 8.4% figure in the LOL [ERCOT Loss of Load] Study. They make two mathematical errors and one significant assumption error that leads them to choose the 8.4% values from the LOL Study for use in the energy-only market construct. The mathematical mistakes alone result in more than a doubling of the direct cost computed by CRA and used in the REMI model [an economic modeling tool]."
"The assumption error also leads to a significant inflation of direct costs because it is safe to say that the actual reserve margin in 2016 will be higher than 10.4%, because CDR predicted reserve margins are historically low, the farther out they are predicted. CRA carries these errors through all 15 years of their study," Wakeland said.
Wakeland observed that one critical aspect of the LOL Study is when the loss of load events are most likely to occur.
"The LOL Study shows that about 95% of the predicted events are likely to occur in July and August and 1,500 MW would roughly be the amount curtailed. Let’s look at the cost of a capacity market using actual data from an existing centralized forward capacity market. The PJM Interconnection LLC (PJM) is a centralized forward capacity market construct often referenced as a model for capacity markets. In 2012 capacity payments for the PJM Reliability Pricing Model (RPM) were $6.02/MWh for the total MWh consumed in PJM. In 2012 in ERCOT there were 324.859 million MWh total consumed. Consequently at $6.02/MWh capacity payment cost for a fully functional, up and running capacity market ERCOT consumers would have had to pay 324.859 million MWh x $6.02/MWh = $1.956 billion just for 2012. In 2012 there were no load curtailments in ERCOT. $1.956 billion a year seems like a rich insurance premium to me. When we look at an annual insurance payment of $1.956 billion we need to ask ourselves what are we getting for that premium that we do not have already? If we believe the studies referenced by CRA and by the CRA Study itself, we only need the aforementioned 1,500 MW of insurance generation during a very limited time during the year," Wakeland said.
"Suppose instead of paying $1.956 billion per year ERCOT established a new reserve service as part of its ancillary services and procured through an auction process 1,500 MW of newly built generating capacity in the form of combustion turbines that was available only for the time periods we really needed it? 99.5% or more of the time it would sit idle. It would not compete with any of the other generation in the market and it would only be used as an emergency source. If we assume a very conservative value of $1 million per MW to construct, it would cost ERCOT consumers $1.5 billion. It would only need to be used for a few hours (if any) at most, in a year. This one-time cost of $1.5 billion is far less than an annual insurance premium of $1.956 billion that a PJM style capacity market would impose on ERCOT rate payers. This 1,500 MW of generation would solve basically all of our resource adequacy problems. So ERCOT could build enough generation to solve this perceived problem and let it sit on the ground waiting to be needed for less than 1/10 the cost of a capacity market," Wakeland noted.
"The capacity market advocates say we need to spend $1.956 billion annually to solve a potential 0.00219% reliability problem," Wakeland said.
"Establishing a mandatory reserve margin requiring customers to purchase capacity is clearly an intrusive form of regulation because customers have no choice in the matter of how much reliability for which they are willing to pay. Instead, they will be required to pay the $1.956 billion as an assessment for the mandatory reserve margin under the guise of ensuring a 0.00219% improvement of reliability. How much would each of the 7,108 MWh cost? $1.956 billion/7,108 MWh = $275,183/MWh. A typical electricity bill is $0.10/kWh or $100.00/MWh," Wakeland noted.
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December 10, 2013
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Reporting by Paul Ring • ring@energychoicematters.com
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