Although much work remains before all its benefits will be realized, the Forward Capacity Market satisfies the criteria for a capacity system that works, while avoiding the need for the...
A West Coast View: The Case for Flow-Based Access Fees
would transfer some of this producer's surplus from the non-local generator to end users, who are no longer responsible for the regional access fee.
For the majority of off-peak periods, however, non-local generators are on margin. They are selling into a market characterized by excess capacity. During this period, it would be hard to pass onto consumers the regional access fee. Again, the PX MCP should not increase by the regional access fee. The long-run price efficiency gained from charging the generators the regional access fee will not result in a higher short-run PX MCP.
In the long run, two major consequences arise from having the generator, instead of end users, pay for fixed costs of the regional transmission system. First, generators will see their profitability reduced. Second, the fees may influence the siting of new power plants. Two examples (reflecting congestion) can help illustrate the potential impact of assigning regional access fees to generators on power plant siting.
No Congestion. The first example, often quoted by advocates of the single (postage-stamp) access fee paid by end users, implicitly assumes that excess capacity exists on the regional transmission system. That is, no new regional network transmission facilities are needed to accommodate a new generator. It also assumes production costs of new, local generation will prove more expensive than new, non-local generation. For example, new, local generation may be a gas-fired combined cycle plant, while a new, non-local plant may be a mine-mouth coal plant. %n8%n The decision on where to site a new power plant is based on operating costs and line losses.
If a generator is assigned a distance-based regional access fee, then the decision to locate a power plant must now consider this additional expense. The generator, looking for its least-cost location, may site the plant closer to the load, and could choose a plant with higher production costs rather than one with lower production costs that is located farther from the load. This dilemma highlights an important issue: When making a long-term decision, like siting a power plant, the total cost of delivered power must be considered, not just the variable cost of producing energy.
For WEPEX, however, this is a moot point, because it is not free of congestion. Regional transmission lines leading into California are fully loaded many hours of the year. %n9%n
Congestion. The second case assumes congestion on the regional transmission path. In this case, if the generator pays for the new transmission facilities, its siting decision will reflect the total delivered cost of power. However, in most instances, an individual firm or group of firms will not find it economical (because of the free-rider problem) to build new regional network transmission facilities. As a backstop, additional transmission costs would be rolled into the existing transmission costs that are paid for by end users.
Here, again, if existing generators pay the regional, distance-based access fee, the least-cost option takes into account both transmission and generation costs, just as the system planner would do, working for the traditional, vertically integrated electric utility.