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 New England Capacity Market That Works
Two authors beg to differ with Goldman Sachs’ Larry Kellerman on what needs mending in the Northeast.
The “food fight in the New England Power Pool”—recently cited as emblematic of “our broken capacity markets” (Larry Kellerman, “ Mending Our Broken Capacity Markets ,” Public Utilities Fortnightly, June 2006) —appears to have been quelled.
New England’s innovative approach, dubbed the Forward Capacity Market (FCM) in the Devon Power settlement (FERC Docket No. ER03-563-055, approved June 16, 2006) , was probably unavailable when Larry Kellerman made his observations in these pages, but it promises to confer new vitality on competitive markets. When fully implemented, the FCM should ensure the right amount of capacity at the right time and the right place, without instituting Kellerman’s proposal for a “planned, organized, long-term capacity acquisition model,” which sounds suspiciously like a return to the traditional regulatory model.
Although much work remains before all its benefits will be realized, the FCM satisfies the criteria for a capacity system that works, while avoiding the need for the centralized planning and control that Kellerman appears to advocate.
Samuel Insull’s 1902 investment in a large, unproven General Electric steam turbine—the jumping-off point for Kellerman’s thesis on the high cost of power created by economic exposure to risky investments—certainly entailed a degree of technological and financial risk. In that era, there was no “regulatory bargain” that ensured the fledgling Chicago Edison an uninterrupted return on its capital or protection from competition. Indeed, this was the short-lived reign of “distributed generation,” when central stations still were proving their worth. Precisely because he faced actual or potential competition, however, Insull managed that risk without the help of a centralized planning apparatus to dictate new capacity additions or price. Indeed, despite the risks, Insull found ways to match supply to demand, increase generators’ capacity factors, and lower costs from 20 cents/kW-hour in 1892 to 2.5 cents by 1909.
New England continues to place confidence in the innovation of generators seeking to maximize their profits within a reasonably contestable market, thereby producing the lowest cost for electricity customers. Adopting the crucial characteristics of Bidwell’s “reliability options” (see “Reliability Options: A Market-Oriented Approach to Long-Term Adequacy,” The Electricity Journal, June 2005) , the FCM will pay for only the amount of capacity necessary to ensure reliability. Its three-year-forward auction, coupled with a five-year commitment period for new or substantially refurbished capacity, will permit new entrants to compete effectively with existing generation. The declining clock auction should set stable capacity prices at the long-term net cost of new entry, thus