The governors of New Jersey and Maryland have embarked on a crusade that could topple competitive energy markets in their states—and perhaps beyond. Glen R. Thomas, former chairman of the...
Power Markets Disconnected? How to Reconcile Retail with Wholesale
in the retail credit. For example, if the wholesale capacity charge produces a smaller dollar amount than the retail demand charge, customers with poor load factors will tend to save relatively more than customers with high load factors. This disconnection can skew market acceptance to low-load-factor customers, contrary to general expectations about the electric market.
Across the country, each retail market is setting different rules for shopping credits, also known as back-out rates or standard offers. In some states, the credits are purely energy-based; other areas have energy and demand charges restricted to a single billing period or seasonal ratchets. In general, states simply are extracting a piece of the existing retail tariff and dedicating it to generation charges in an effort to avoid inter- and intra-class revenue shifts.
At the same time, the structure of the wholesale markets is being ignored. With two systems operating asynchronously, it is more difficult to identify what savings can be offered to individual customers. That increases the transaction costs of obtaining a retail customer. It also can cause de facto discrimination of benefits among customers shopping for electricity.
States need to invest more heavily in the development of a shopping credit with a design congruent to the wholesale market's. Some type of time-differentiated shopping credit, even based on agreed-upon load profiles for smaller customers, may be a good answer. Such a credit would encourage construction of wholesale transactions that could be compared with relative ease.
3. Eliminate Capacity Obligations.
In some markets, such as PJM, suppliers are required to purchase capacity in addition to firm energy. However, capacity markets are often liquid.
A great deal of uncertainty and risk can arise in a market where there is an explicit capacity obligation in the wholesale rules without a liquid market for capacity. Even in markets with excess installed capacity, retail suppliers fear the uncertainty of anomalous price spikes caused by high weather-driven demand, unplanned unit outages and/or capacity hoarding by incumbent utilities. A one-week spike in capacity prices can increase the average annual cost of electricity by a couple of mills per kilowatt-hour. This increase is significant in a market where margins are often a mill or less.
In addition, with capacity pricing uncertainty come market power, capacity availability and gaming. As markets open, suppliers often find that they can buy all the energy they want but none of the capacity they need. Without proper safeguards, incumbents can create shortages by selling capacity outside of the ISO. This wholesale behavior by holders of capacity can bring retail markets to a screeching halt.
The simplest solution is to eliminate the requirement for capacity purchase and require only that firm energy be purchased. Separate capacity obligations do not exist in many regions, with no adverse impact on reliability.
If, for some reason, that is not possible, there are several second-best solutions including requiring that a utility's installed capacity follows the customer when the customer switches suppliers; requiring that utilities divest their capacity (and generation), thereby creating a more liquid market; and/or requiring that there be an auction of