Despite the hype about cheap gas, pipeline constraints are creating new risks. New England’s wholesale power prices ran three times as high this past February compared to the same month in 2012....
savings in the NEMA and SWCT zones ($8 million and $13 million, respectively) the projects could well add $42 million in annual LICAP costs across the entire ISO region, taken together.
This perverse result occurs because the projects are designed to produce benefits in smaller zones that, on a load-weighted basis, don't really represent the greater good for the entire region:
"The decrease in NEMA and SWCT clearing prices," Daly explains, "would impact fewer megawatts of capacity than the increase to [the] Rest-of-Pool and Maine clearing prices."
Finally, private consultant Roy Shanker worries about gaming the market.
He notes that the ISO plan allows LSE's or other parties who represent load to offer up "phantom" load management projects in the LICAP auction process. That would depress the load requirement in the zone, and reduce the value of OC. Thus, as measured as a function of OC, the capacity level in the zone would increase, moving the zone to the right along the demand curve, and reducing the price.
But, as Shanker also notes, these load management programs have no obligation to perform, so the LSE's could then withdraw them without penalty after the LICAP auction is completed, but before the closing of the day-ahead market and the finalization of real-time dispatch:
Shanker sees this "gaming by load" as a perverse consequence and a serious flaw in the market design:
"Basically, load gets a no-risk ability to depress prices by artificially inflating the supply."
New England's LICAP Regime
1. Calculate LICAP Obligation.
Region-wide Peak Demand. Fix peak demand for ISO region. Region-wide Reserve Margin. Add 12 percent margin to reach OC. Zonal Allocation. For each month (LICAP is a monthly obligation and the market clears each month), allocate OC by load among the five LICAP zones, and among LSEs by load within each zone. This OC allocation sets the LICAP requirement for each zone and for LSEs in the zone. (A portion of this requirement - the LSR, or "Local Source Requirement" - must be supplied from local resources because of local grid constraints and operational requirements.) Zonal Obligation. Require LSEs to obtain the required LICAP, either through bilateral contracting or through the monthly short-term LICAP auctions (two each month, held the month prior to the obligation month).
2. Calculate the estimated cost of constructing new generating capacity.
Hypothetical Plant. This benchmark unit represents a "frame-style" gas turbine of utility-level quality, as opposed to an "aero-derivative" unit that is basically just an airplane jet engine turned on end. Characteristics include size (85-100 MW), heat rate (9,000 - 10,400 Btu/kWh), exhaust temp (990 - 1,120 degrees F), compression ratio (16:1), start time (30 min.), startup cost ($8000 plus fuel), minimum run time (4 hours), total installed cost ($550-650/kW). Zone-Specific Benchmark. For each LICAP zone, calculate the estimated benchmark cost of capacity (EBCC), expressed as $/kW-month. EBCC represents the estimated cost of building new generation on the margin. EBCC for each zone reflects the many separate, zonal-specific cost parameters that come into play, such as cost of land, labor costs, income and property taxes, etc.