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Capacity Contest

Raising the stakes in RTO markets.

Fortnightly Magazine - February 2011

LSEs self-scheduling by posting matching bids and offers. Their inclusion in the auction is intended to produce a clearing price based on the entire footprint, rather than just the smaller sample of spot trades.

“Everybody has to be in the market,” Hillman says. “But you can self-schedule your load against your resources, and your exposure to the cleared price will be nil. That’s important for companies that have generation in their rate base. We have to make sure that as part of a level playing field, we’re incorporating enhancements that will assist our members in retail-choice states without jeopardizing the interests of those in regulated states.”

MISO hopes this approach will produce transparent price signals and ultimately provide buyers with lower capacity prices, so eventually those who self-schedule will begin to see economic benefits from participating fully in the auction. “We’re not necessarily building the market for today’s situation, because right now we have overages,” Hillman adds. “We’re thinking about what the market could be like two or three years down the road. Just a few years ago gas was priced at $15, coal deliveries were hard to get, and people were concerned about cold winters and hot summers. Now is the perfect time to think ahead.”

Like PJM, the Midwest ISO is trying to figure out the appropriate time horizon for forward capacity auctions, as well as the number of annual terms open for bids and offers. “The goal is to balance market uncertainty—meaning EPA regulations, state mandates, plant retirements and fuel costs—against how much time you need to develop new resources,” Hillman says. “One thing is for certain: the further out you go into the future, the less certainty you have.”

Dumping Capacity

Despite the apparent attraction of capacity auctions in the Northeast and Midwest, RTOs elsewhere in the country have thus far spurned the idea.

In Texas, for example, ERCOT recently replaced its zonal pricing system for energy and ancillary services with a nodal system, but it continues to eschew anything resembling a long-range capacity market.

And last summer the California ISO decided, after an exhaustive three-year process, to forgo creating a capacity market—in part because the structure didn’t seem to serve the state’s policy goals. “We find, on balance, that maintaining the current bilateral contracting approach best meets [California’s] program objectives at this time,” wrote the California ISO in a filing before the state PUC. “Proponents of the centralized capacity auction mechanism did not persuasively demonstrate how such a system could be structured to prioritize renewable resources and otherwise support the Commission’s environmental goals” (see “Decision on Phase 2—Track 2 Issues: Adoption of a Preferred Policy for Resource Adequacy,” CPUC Rulemaking 05-12-013, issued June 7, 2010) .

Resistance to capacity markets also seems to be rising within the heart of PJM.

Just last month, the New Jersey Assembly passed legislation (A3442/S2381) that among other things accused PJM’s capacity auction of loading $1 billion of additional costs onto ratepayers in the state, and tilting the playing field against new market entrants. Assuming Gov. Chris Christie signs the bill as