Brattle Would Allow Texas Resources Subsidized by Customers to Earn Inframarginal Energy Revenues Without Clawback

The Brattle Group's recommended design for a Texas mandatory capacity market would allow capacity resources whose fixed costs are subsidized by Texas ratepayers to fully earn scarcity, inframarginal energy market revenues without being subject to any clawback or offset.

Brattle's recommendation came in an outline of various composite policy alternatives, including "Energy-Only with Administrative Support" (such as capacity payments to demand response or the withholding of reserves) and a capacity market.

Link to Brattle review of composite options

With respect to the capacity market, Brattle specifically recommended, "against an energy margin 'clawback' mechanism to recover revenues earned during scarcity."

Such mechanisms (such as the energy & ancillary services offset) are in place in other capacity markets, and recognize that customers have paid the costs incurred by the capacity resources to be available and enjoy such scarcity revenues, and therefore are entitled to such revenues.

Notably, Brattle recommended maintaining the high energy market price caps under a capacity market, though it did recommend reducing the generator offer cap to $1000/MWh if capacity payments are available.

Brattle said in support of its recommendation against a scarcity clawback:

"• Generators are largely not exposed to spot prices. Shouldn't clawback margins they didn't earn

"• Would undermine energy price incentives if not designed carefully

"• Total cost volatility (from energy + capacity prices) is lower with a capacity market than energy-only"

So, according to Brattle, it's a problem to clawback margins that resources do not earn (though they had the opportunity to earn). But Brattle has no problem forcing customers to pay resources for costs that resources do not incur, as customers do under the operation of a uniform clearing price capacity market, where, by definition, all but the marginal unit or units are being subsidized by customers at a price exceeding their going forward costs.

Brattle did note serious problems with implementing a forward capacity market, particularly with respect to the transition period (which Matters would note drew the loudest criticism in PJM).

"Because there is no supply surplus to ease the transition, there are two serious challenges," Brattle said of a capacity market:

• Timing – "If market design is completed in late 2014, there may not be enough time [for] developers to meet 2015 needs"

• Sticker Shock – "Sudden addition of capacity costs will cause 'sticker shock' for customers and risks a backlash"

Brattle also concedes that there is a question of whether a capacity market could be implemented fast enough to address "impending" 2015 resource adequacy issues.

Brattle also conceded that the capacity "market" has, "[m]any administrative determinations" including the load forecast, reserve margin requirement, demand curve shape, and resource adequacy qualification rules, all of which, "have a big effect on prices."

"Ongoing litigation over parameters and rules can create market uncertainty," Brattle said.

Notwithstanding all these issues with the capacity market (and more which Brattle failed to consider), Brattle still labeled a capacity market the "best" option for reliability, even while conceding, "No construct provides perfect reliability."

Matters does not dispute that last point, which is why Texans must seriously consider whether a multi-billion dollar annual capacity market is the preferred solution if the construct cannot provide perfect reliability, which appears to be the goal of the Commission. While Brattle claims reliability cannot be achieved through the energy-only design (contrary to 10 years of history), at least, if perfect reliability is not attained under energy-only, customers haven't paid billions of dollars for this imperfect reliability. Where is the value in guaranteeing billions of dollars annually to existing resources -- which will be around under an energy-only design with high or uncapped prices -- if the capacity market will not assure reliability?

Indeed, Brattle called "ideal" an energy-only endstate with an active demand side, which Brattle noted could possibly be achieved with aggressive support for demand response.