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SHOCK: Texas Capacity Market Supporter Asks FERC to "Permanently Eliminate" $1,000/MWh Price Cap in New York

January 29, 2014

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

NRG Power Marketing LLC and several affiliates have asked FERC to, "require NYISO [New York ISO] to submit tariff revisions to permanently eliminate the $1,000/MWh bid cap."

We emphasize NRG's use of the term "eliminate" in lieu of "raise" or "modify." While an elimination of the $1,000/MWh price cap could be achieved through a replacement with a higher cap (e.g. $2,500, etc.), NRG in its comments offered no alternative level for the cap.

NRG merely said that the required tariff revisions should, "allow the NYISO to set market prices from resources above $1,000/MWh," and that the, "fundamental principles of the NYISO LBMP energy markets are to reflect the true price of production for the marginal unit of energy."

NRG, in its comments, did not make its recommendation contingent on other market design changes, and consistent with its past positions, we understand that NRG is seeking to permanently eliminate the $1,000/MWh cap while retaining the existing NYISO capacity market.

"The construction and setting of the $1,000/MWh price cap over a decade ago may have been just and reasonable at the time, as fuel prices of this magnitude were inconceivable, and the price was set high enough where it was perceived never to interfere with the representation of actual costs. Since that time such a cap is no longer just and reasonable: (i) the landscape of commodity prices has changed, and (ii) since the implementation of the $1,000/MWh cap, the NYISO has implemented a variety of mitigation measures, including the Automated Mitigation Procedure and very sophisticated market monitoring and screening processes. As a result of the mitigation measures that have been subsequently placed into effect, to the extent the $1,000/MWh cap was also a backstop, it is much less necessary. Thus, the justifications for the $1,000/MWh cap on market bids no longer persist and it is imperative that resources in NYISO not only be able to receive compensation for their production, but for the market itself to reflect the costs of these resources," NRG said.

NRG said that the currently used alternative to its desired "efficient" pricing which would reflect the true price of production for the marginal unit of energy, "is a market price which sends a potentially inaccurate signal of what New York is willing to pay for the production of energy."

We have to chuckle at this sudden concern with a distortion of what customers are willing to pay for a commodity. New York's capacity market, whatever its merits may or may not be, unquestionably, "sends a potentially inaccurate signal" of what New York is willing to pay for capacity, in using an administratively determined demand curve, which ignores what customers are actually willing to pay for capacity (which, for economic resources, would be $0 since customers know the generators will recover fixed costs in the energy market and therefore won't exit if customers don't pay a capacity payment to that specific generator).

NRG also presents FERC with a false choice of either granting its request, or dooming customers to unhedgeable make-whole payments.

Specifically, NRG said that NYISO's proposal to provide make-whole payments to generators with verifiable costs in excess of $1,000/MWh, but with such costs not setting the LMP, "would increase uplift costs to New York consumers, forcing consumers to bear these costs in an unhedgable mechanism."

"If generators are allowed to bid their true costs, the costs passed on to consumers may increase, but load and consumers will have the opportunity to hedge those costs. Fundamental market design principles would necessitate the reflection of resources' costs in the energy LBMP," NRG said.

We certainly agree with the concern about unhedgeable costs -- one of our main problems with a capacity market.

However, eliminating the $1,000/MWh price cap is not the sole solution available in order to avoid the uplift cited by NRG. The alternative -- and we think the more equitable one -- is to simply not pay the make-whole payments, at least for resources which have a capacity supply obligation, and which agreed to provide energy under the current market rules.

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