Should capacity markets focus solely on resource adequacy or should greater focus be placed on resources with certain operational capabilities, such as flexibility?
That is a question asked by Federal Energy Regulatory Commission member John Norris in a Sept. 20 statement of views prior to a Sept. 25 FERC conference on capacity market issues.
Upon his arrival at FERC in 2010, a great deal of his time was consumed assessing the capacity markets in the three Eastern regional transmission organizations/independent system operators (RTO/ISOs), Norris wrote. To date, Norris said he has lost track of the number of times the commission has had to address capacity market design issues in the three Eastern RTO/ISOs.
“I look at the Commission’s upcoming Technical Conference on Centralized Capacity Markets as an opportunity to stop and assess where we have been with capacity markets, where we are now, and how we should move forward in the evolution of these markets,” he added. “I appreciate the huge amount of interest in this conference that has been expressed by many groups and individuals. Those responses are indicative of the importance and timeliness of addressing the many issues surrounding capacity markets.”
Key questions to keep in mind, Norris said, include:
- Are the centralized capacity markets meeting the consumers’ need for energy at peak demand plus a reasonable reserve margin in the most efficient and cost-effective way possible, and if so how? If not, then why not? What changes need to be made to achieve a more efficient and cost-effective outcome? Ideally, capacity markets should provide the revenues to resources that would otherwise be provided in a properly functioning energy-only market plus the established level of needed reserves for reliability. That being said, there seems to be an on-going need for administrative “fixes” to the existing capacity markets, Norris said. “My concern is that the more administrative fixes that we layer on top of capacity markets, the greater the potential for inefficiencies and higher costs.”
- Should parties be concerned that continual administrative fixes may be preventing the capacity markets from achieving competitive outcomes? One key factor in the continual need for administrative fixes is the conflict between state and local policy objectives (such as renewable energy or energy efficiency) and efficient wholesale capacity market prices. FERC’s orders over the last several years have found that where there is a conflict between the two, wholesale markets trump public policy. Are these the right calls? Do these two purposes always have to be in conflict or are there ways in which we can respect the ability of state and local entities to determine their own resource mix while still adhering to our statutory responsibility to ensure just and reasonable wholesale prices?
- Norris is also concerned about those entities who desire to self-supply their capacity needs through owning their own resources or bilateral contracting of resources. Similar to the choice conflict that exists with state or local public policy goals, does denial of an entity’s desire to meet its own system’s needs unreasonably prevent it from meeting its customer needs? Can a self-supply and corresponding bilateral market co-exist with a capacity market?
- “Our electrical system is not static and in fact is going through significant changes,” Norris wrote. “We will have to meet our future resource needs in light of significant changes to our nation’s generation mix, demand side possibilities, and the emergence of new technologies that potentially provide more efficient and cleaner energy. Will these changes, such as an increasing supply of variable generation, necessitate significant changes to our existing capacity markets, minor changes, or no change at all?”
- Should capacity markets focus solely on resource adequacy or should greater focus be placed on resources with certain operational capabilities, such as flexibility? If there is a focus on certain operational capabilities, how is that best achieved while ensuring that we also meet the overall objective of capacity markets? For example, is there a need for different capacity markets for specific resource characteristics or can this need be met within the existing single capacity market for each RTO/ISO?
- Another significant change occurring is the increasing levels of distributed generation. Are the parties exploring ways to account for this increasing generation source to ensure capacity markets are not over-procuring resources?