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One Fine Reliability Mess

Infrastructure isn't keeping pace. So how to "help" the market without killing it?

Fortnightly Magazine - August 2005

Locational Installed Capacity (LICAP). They urged the commission to reject it before it becomes effective Jan. 1, 2006.

The representatives wrote: "Because the LICAP payments are only 'incentives,' this money will go to generators without any requirement or commitment from them to build any power plants. It is therefore entirely possible that ratepayers could spend $13.5 billion for nothing. … There is no evidence that [LICAP] will result in new generation in New England in the time frames needed."

Steven Stoft, an economist and consultant to the California PUC, and who has spent almost five years working on capacity adequacy, does not find the politicians' views surprising. When he first began looking into capacity adequacy, he remembers, "No one wanted to listen because we were having too much generation built, and no one thought it could possibly be a problem."

Stoft says that the problem is that the existing day-ahead and real-time spot markets, operated by the nation's regional grid operators and RTOs, do not send a signal for adequacy.

"The market is an energy market. It is not a reliability market. Adequacy is equivalent to reliability. If the market could do adequacy, it could do reliability. And we know it can't, because it has absolutely no information about what anyone is going to pay for that," he says.

The problem with setting an "adequate" level of capacity, Stoft says, is that above a certain level the market doesn't really know where to set it. He calculates that California would be paying around $3.6 billion in "scarcity rents" (the market premium that power supplies ought to command during momentary periods of relative shortage) if there were enough generation.

Using the cost of a peaker in PJM-"to be cautious, $72,000 a MW/year [$8.21 per MWh]," he says-Stoft multiplies it by the amount of capacity needed: "about 50,000 MW." That amount of money is what the market would pay if it had the right amount of generation.

But the reality in all the Eastern markets, with their mandated bid caps for supply offers, is that they simply do not permit a high enough revenue stream to pay power-plant investors for scarcity rents.

"In New England it looked like it was about a quarter [too low]," Stoft said. "In PJM it looks like it's about a third. In California, the price cap is lower than back East. It could be even less than that."

So, are consumers really threatened with sky-high costs for reliability, as the senators say? Or, on the other hand, are they paying too little?

PJM: A Contentious Plan

As this issue went to press, PJM's Reliability Pricing Model (RPM), long under development (a prototype of sorts was vetted in November), had not yet won enough adherents to justify filing a formal proposal at FERC. Certainly, there was no lack of spirited debate on the plan at FERC in June.

PJM's plan, as with New England's LICAP model, would take into account all various local transmission constraints that dictate placement of new power plants and how well they can deliver their output