Federal Energy Regulatory Commission staff, ahead of a Sept. 25 technical conference on centralized capacity markets in regional transmission organizations and independent system operators (RTOs/ISOs), issued an Aug. 23 update on the involved issues.
The purpose of the technical conference is to consider how current centralized capacity market rules and structures are supporting the procurement and retention of resources necessary to meet future reliability and operational needs. Speakers at the conference will focus on the goals and objectives of existing centralized capacity markets and examine how specific design elements are accomplishing existing and emerging goals and objectives.
To that end, staff said it has examined a set of design elements present in the centralized capacity markets operated by the three eastern RTOs/ISOs: PJM Interconnection, ISO New England (ISO-NE) and the New York Independent System Operator (NYISO). Staff in the Aug. 23 report summarizes the approaches taken by the eastern RTOs/ISOs with respect to these design elements and discusses the impact particular market design choices can have on the procurement of capacity resources.
To maintain reliable operations, electric systems must maintain enough capacity resources to meet peak load requirements plus a planning reserve margin. Under traditional utility regulation, resource adequacy is met by load-serving entities (LSEs) obtaining regulatory approval to hold a portfolio of resources, the costs of which (including a reasonable return on investment) are recovered from captive customers.
In areas of the country that have restructured electricity markets, many LSEs compete for retail customers with other suppliers, creating financial risk for long-term resource commitments, and in many cases have divested generation to independent power producers that compete for sales and thus have no guarantee of cost recovery, the staff report noted.
Early on, the eastern RTOs/ISOs employed rules requiring load-serving entities to maintain adequate capacity resources to meet the planning reserve margin, coupled with a deficiency charge assessed to members who failed to meet their capacity requirements. The original capacity market designs were voluntary balancing markets intended to provide transparent market-based mechanisms to assist LSEs in meeting installed capacity obligations. These market constructs generally procured capacity on a daily or monthly basis with a short lead time and relied on deficiency charges to set market prices, FERC staff said.
“Over time, concerns grew that these early market-based capacity constructs were inadequate to ensure long-term resource adequacy,” staff added. “In response, centralized capacity markets were implemented by the eastern RTOs/ISOs to provide more lead time and certainty for investment in new capacity resources, including an adequate opportunity for all resources to recover both their variable and fixed costs over time. The Commission has provided each region with flexibility as to market design and has not required a ‘one-size fits all’ approach. However, the primary goal of each of these markets is the same: ensure resource adequacy at just and reasonable rates through a market-based mechanism that is not unduly discriminatory or preferential as to the procurement of resources.”
In recent years, refinements have been pursued or discussed to address the impact that broader industry changes have had on the markets, including the evolution in the mix of available resources driven by low natural gas prices, state and federal policies encouraging the entry of renewable resources and other technologies, state policies supporting the development of resources in particular areas or with particular characteristics, the retirement of aging (mostly coal-fired) generation resources, and the need to retain certain resources.
Because FERC has considered these variables on a case-by-case basis, there has been limited opportunity for the commission to consider more broadly how the centralized capacity markets are accomplishing their intended goals and objectives through a competitive, market-based process, staff pointed out.