Posts Tagged ‘capacity markets’

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RTO forward capacity markets are unlikely to succeed

April 6, 2012

Michael Giberson

The Gulf Coast Power Association meetings earlier this week included a debate over the future of resource adequacy within the ERCOT power system. Debate moderator Eric Schubert, BP Energy Company, introduced the issue with a critique of capacity market structures that is heavy on its reliance on Hayek’s knowledge problem. It is a topic dear to our heart here at the Knowledge Problem blog, so I thought we’d share a bit of it.

Here’s Schubert:

Hayek’s “Knowledge Problem” and its optimal solution – decentralized commercial markets – provide the best lens for regulators to see the fundamental issue in electricity market design in response to rapid technological change and increasingly diverse groups of buyers and sellers. As the procurement and use of electricity cross a complexity threshold, as a few customer classes are transformed into a multitude of individual market participants, the electricity market design needs to move away from centralized planning to a decentralized procurement of resources, to be both sustainable and efficient.

… In trying to adapt the centralized forward capacity mechanism to changing market and technological conditions, regulators and RTOs play a never-ending game of “whack-a-mole” because they can never overcome the “Knowledge Problem.” Even worse, under centralized procurement or any type of explicit “top-down” procurement of new resources mandated by regulators, unintended consequences of centralized procurements arise at the speed of markets and are corrected at the speed of administrative law.

Both long-standing economic theory and recent economic practice suggest that centralized forward capacity mechanisms are very unlikely to succeed. If they fail, state and federal regulators in the US will be forced to choose between the two known solutions to the “Knowledge Problem”:

  • A return to full integrated resource planning conducted by regulators, or
  • A move to fully decentralized wholesale and retail markets where individual customers make their own choices.

… Integrated resource planning, however, solves the “Knowledge Problem” by suppressing it. Having regulators in charge of integrating 21st century technologies would prevent consumers, retailers, and other market participants from using their local knowledge and ingenuity to find the next killer app or great idea that would provide all of us cleaner, more efficient and thoughtful use of energy. Or put another way, would we even have I-Phones today if regulators had never broken up Ma Bell?

[The alternative approach is that] with the proper price signals, buyers and sellers in ERCOT’s energy-only market will procure and manage sufficient resources to meet their individual needs and preferences while keeping the market resource adequate. Such decentralization of decision-making is the most efficient solution to the “Knowledge Problem.” The challenge of this path, however, is keeping the lights on during the transition; none of us can fully understand at this moment how the integration of the new technologies will happen, and what new ways of doing business and managing electricity use will spontaneously emerge over time.

By the way, in that first ellipsis I excised a reference to and quote from a great paper by Kenneth Rose that takes a detailed look at RTO capacity market structures.

Schubert’s full introduction is publicly available on the GCPA website, but only for the next month or so. Get it while it’s hot (and available).

Posted in Electricity, Energy markets, Regulation | Tagged , , | Comments Off

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Economics of power market design compared unfavorably to climate science

June 16, 2011

Michael Giberson

From the Harvard Electricity Policy Group meeting in February 2011. By convention the meetings are off-the-record, so the speaker’s name is not identified in the summary:

I think the most important distinction between the fields of climate science and economics for me is the question of evidence. Science is characterized by a subtle interplay between conceptual models and the evidence that supports or contradicts them. There’s a rigorous process of analyzing and evaluating evidence and improving or discarding the conceptual models as the evidence dictates. In economics, evidence can often be harder to come by and more ambiguous in nature. This instance is a strong case in point. There is no real precedent. The markets are brand new. And with a few exceptions, the RTO regions have been basically in capacity surplus since the markets came into being for reasons having nothing to do with the capacity markets themselves.

Where evidence is lacking, theorists can find themselves somewhat less constrained. Under these circumstances, whichever side has the loudest voices or the most money or the most impressive resumes can dominate the conversation. This should never be mistaken as proof that their position are correct.

[...]

I’m aware that many will argue, and have argued, that a focus on market efficiency will in the long run lead to the greatest consumer benefit. This may be true in a nonexistent, two-sided perfect market with no barriers to entry. But it is a tenuous article of faith when applied to real electricity markets. And given the untold billions in costs to get to that uncertain future, it’s no wonder that consumer advocates basically unanimously are not eager to take that bet.

The implementation of capacity markets based on these unproven theories has already led, predictably, to the transfer of tens of billions of dollars of ratepayer wealth to generation owners. I say predictably because this outcome was clearly anticipated by all parties and articulated by many. The whole point was to raise costs. On the other hand, there’s not a shred of hard evidence that this process has led to new generation where it is most needed, or to avoided retirements of needed capacity or to cost-saving transmission investments. These are the ostensible purposes of the construct. There is no reason to believe that it would. It’s just too good an arrangement for existing generation owners as it is.

The speaker observes that capacity markets have also spurred development of demand-side resources, but this “positive benefit … has come at an astronomical cost.”

As an alternative to capacity markets, the speaker suggests a combination of state-sponsored investments, long term contracts, and short term spot markets. Not that he presents any evidence that this approach will work better for consumers, it just seems good to him. I wonder, scientifically speaking, why not just examine the existing evidence on prices and investments in “energy only” power markets in Texas, Alberta, and Australia?

Posted in Economics, Electricity, Science | Tagged , | Comments Off

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Meanwhile, more “power market and the state” battles in New Jersey and Maryland

March 23, 2011

Michael Giberson

And if Andrew Kleit thinks that the Pennsylvania state government is toying with a bad idea (see previous post), look what is going on next door in New Jersey and Maryland.

In New Jersey: “Utilities challenge New Jersey law while preparing to reap its benefits.”

In January the Governor signed a law which is intended to facilitate long-term capacity agreements between the state’s electric distribution companies and generators. As the linked story explains, PSEG is considering building power plants that would benefit from the law – the long term guarantees will help the utility secure lower-cost finance – and “allowing [developers] to build facilities or undertake projects that would not have been feasible otherwise.” At the same time, PSEG is among the members of a coalition of companies that have protested the state’s law at FERC and a member of another group which has filed a challenge to the law in federal court.

Dow Jones Newswire explains: “PSEG and other power producers say this program undermines the U.S.’s largest competitive-electricity market by skewing market prices. They are in the process of suing the state over the legislation in a U.S. District Court and filed a complaint with the Federal Energy Regulatory Commission. Just in case those efforts fail, PSEG is preparing to work under the program.”

Do they contradict themselves? Very well, they contradict themselves. PSEG is large, like one-time New Jersey resident Walt Whitman, they contains multitudes.

In Maryland: “PSC, generation firms debate auction rule.”

The Maryland Public Service Commission on Friday [March 4, 2011] filed a protest with the Federal Energy Regulatory Commission over efforts to do away with breaks at wholesale power auctions that given to new plants that are built with state subsidies. Two groups, P3 Power Providers Group and PJM Interconnection LLC, don’t want those subsidized plants to be allowed to bid less than an administratively set benchmark price.

In both the New Jersey and Maryland cases, among other things the generators are concerned that state involvement in subsidies or guarantees for new investment would undermine operation of the PJM capacity market.

Also see: Court Rules PJM Capacity Market Prices Adequately Protected from Seller Market Power, but Others Contend Not Protected from Buyer Market Power. (Energy Legal Blog).

Posted in Electricity, Energy markets, Politics, Regulation | Tagged , , | 1 Comment »

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FirstEnergy seeks switch from Midwest ISO to PJM

July 31, 2009

Michael Giberson

Platt’s reports:

FirstEnergy will switch its Ohio electric transmission assets from the Midwest Independent Transmission System Operator to the PJM Interconnection with its other transmission assets, the Akron, Ohio-based company said Friday.

“Aligning all of our transmission assets with PJM will provide customers with the benefits of a more fully developed retail choice market and enhanced long-term planning that supports construction of new generation when and where it is needed,” said Anthony Alexander, FirstEnergy’s president and CEO. “In addition, PJM supports incentive-based demand response and energy efficiency programs that give customers more control over their energy use and encourage peak load reductions that drive down prices for customers.”

Most of FirstEnergy’s transmission assets in Pennsylvania, and all of those in New Jersey, already operate in PJM. FirstEnergy’s American Transmission Systems subsidiary, which includes transmission assets within the service territories of Ohio Edison, Cleveland Electric Illuminating and Toledo Edison, currently operates within Carmel, Indiana-based MISO.

See also the FirstEnergy news release.  A few things stood out in this brief story:

While RTOs integrate transmission system operations with a wholesale power market, FirstEnergy emphasized customer benefits from “a more fully developed retail choice market” in its statement.  Since the retail choice markets connected to the FirstEnergy transmission grid are and will remain regulated by the Public Utilities Commission of Ohio, it is interesting that FirstEnergy claims a difference based upon wholesale markets.  Electric power economists as well as federal and state industry regulators ought to be interested in these wholesale-retail power market interactions; I think the area is under-understood.

The statement’s reference to “enhanced long-term planning that supports construction of new generation when and where it is needed” appears to refer to PJM’s RPM market (revised generation capacity market which started in 2007).  FirstEnergy is suggesting the “enhanced long-term planning…” will provide customers with benefits, so is a reason to join PJM.  On the other hand, Duquesne Light claimed the RPM market as a reason it wanted to switch from PJM to MISO, as the increased costs to customers would be too high (Duquesne subsequently chose to remain in PJM).  So are consumers better off or worse off because of the RPM market?

And finally, the remark that “PJM supports incentive-based demand response and energy efficiency programs” that will drive down prices for consumers. I’m sure that MISO also “supports incentive-based demand response … programs,” after all, that the politically correct attitude for regulated entities in the electric power industry.  Good demand side market participation is key to getting markets to work well.  If PJM does it better than MISO, then I’d be interested in learning just how PJM is better.

Of course, talk about better this and lower that at best just part of the story. Presumably FirstEnergy would not pursue the change unless it expected to profit from the change.  Nothing wrong with that, but consumers will want to be sure that any additional profits come about because of better service and operating efficiencies available to the company.

NOTES: “RTOs” are “Regional Transmission Organizations,” the FERC-regulated managers of transmission systems with integrated energy markets.  The two RTOs in the story are PJM (which initially covered most of Pennsylvania, New Jersey, and Maryland, but now extends to much of Ohio, the Chicago area in Illinois, and Virginia), and MISO, the Midwest Independent Transmission System Operator.

Posted in Electricity, Energy markets | Tagged , , | 4 Comments »

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