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Commission Watch

LICAP and Its Lessons:
Fortnightly Magazine - January 2005

reach 1.12 times OC. That's a reserve margin of a whopping 24 percent, with an implied LOLE (loss of load expectation) at a miniscule 0.0019. In that case, Daly says that customers could end up paying $27,600 per year per megawatt to any generator electing to bid. That could reward a 100-MW gas turbine with a capacity payment up to $2.76 million a year, just for keeping itself available to avoid that single outage that would be expected to occur on one day in 526 years!

The Market

The ISO would define five different LICAP zones within New England, tied to electric system geography (interfaces and such) rather than to political boundaries: (1) Maine, (2) Southwest Connecticut, (3) the Rest of Connecticut, (4) the Boston and Northeast Massachusetts zone, and (5) Rest of Pool. It would set the auction price of capacity within each LICAP zone using a complex process.

The ISO would calculate the quantity of generating capacity installed within any single zone (how much surplus or shortage), in terms of a percentage of the OC quantity. The ISO then would figure how much (if any) that LSEs should have to pay to developers to maintain that level of supply, or to encourage them to build more. (Or, if the surplus is great enough, exceeding the C-max level, then LSEs pay nothing.)

In truth, the demand curve (like the fictitious supply curve already discussed) does not represent a summation of bids by buyers, but in fact represents the ISO's administrative determination. The ISO estimates how much money should be paid to capacity suppliers, at various levels of surplus or shortage, in order to encourage suppliers to construct or maintain a target level of electric generating capacity in each zone. In this regard, the New England LICAP design mimics (on a zonal basis) the same basic theory that the NY ISO employs to set its demand curve.

Unit Availability

Perhaps the strongest objections to New England's LICAP market design concern two major wrinkles: the "critical hours" rule, and the credit adjustment for infra-marginal energy revenues.

The first wrinkle is the definition of unit availability. First, the LICAP auction counts a plant as available only if it is actually dispatched by the ISO (or self-scheduled by the owner), or is capable of a startup in 30 minutes or less. But more important, the ISO defines certain hours as "critical hours" (100 each year, with a minimum amount for each month), based on the unit's "z-score," as determined by an evaluation of shortages, price peaks, and fuel-cost trends. Then, the ISO tests to what extent the plant was dispatched or scheduled during all of the critical hours during a rolling 12-month period. And some hours are deemed more critical than others. The ISO refers to this effect as "criticalness." The hours are weighted accordingly. Thus, a unit may qualify as available for only a fraction (say 40 percent) of such hours. That means the ISO will subtract a corresponding amount from the nominal LICAP price otherwise paid to the unit.

The second wrinkle is