NYISO Management Response to FTI Consulting Report Evaluation of the New York Capacity Market

Transcription

1 NYISO Management Response to FTI Consulting Report Evaluation of the New York Capacity Market March 2013

2 Evaluation of the New York Capacity Market Introduction In an effort to evaluate and, where appropriate, identify potential enhancements to the efficiency of the New York Independent System Operator s (NYISO) capacity markets, the NYISO engaged the services of FTI Consulting to conduct an independent review of the NYISO s capacity markets and assessment of alternative market structures. The NYISO worked closely with stakeholders to develop a set of objectives for this study with a goal of producing comprehensive recommendations for viable market enhancements designed to ensure resource adequacy and the efficient functioning of capacity markets. Importantly, in commissioning the study the NYISO emphasized the need for recommendations to be considered in the context of their design and implementation costs to better inform the NYISO and its stakeholders, generally, of the potential risks and costs as well as benefits associated with pursuing any given recommendation. In addition to helping shape the scope of work for this effort; stakeholders were given the opportunity to review and comment during FTI s development of the report, and on a draft of the report. FTI s final report reflects FTI s consideration of stakeholders input and best efforts to balance stakeholder interests. The purpose of the capacity market review was to evaluate the performance of the NYISO s capacity market in conjunction with analysis of alternative capacity market models and recommend ways in which the NYISO s capacity market might be enhanced. As part of this review, the NYISO sought information and recommendations on the ability of its capacity market, in conjunction with regulatory requirements and resource planning processes, to provide adequate notice to the NYISO to address reliability planning obligations. The NYISO was specifically interested in evaluating the desirability of a forward capacity market in New York with a three- to five-year reserve adequacy reliability criterion. In conducting its analysis, FTI reviewed the design and performance of capacity markets in PJM and ISO- NE. Specifically, FTI examined the ability of those markets to attract new capacity, maintain existing capacity, including demand-side resources and repowering projects, and respond to imminent generator retirements with sufficient lead-time to develop viable market and/or regulated options capable of addressing possible reliability issues. The goal was to identify the relative strengths and weaknesses of these markets and help the NYISO to understand if there are any features of these markets that might enhance the NYISO s capacity market design. Findings, Recommendations and Responses The findings of the FTI analysis are contained in the report, Evaluation of the New York Capacity Market. i FTI generally concluded that the NYISO s capacity market contains no critical flaws that are not already in the process of being addressed. Specifically, FTI identified the need for one or more additional capacity zones east of the Central East transmission interface. FTI stressed that this should be done in conjunction with implementation of a routine process for identifying new capacity zones and modeling them in the capacity market auctions prior to the time that they are needed to support reliability. FTI believes, and the NYISO agrees, that the NYISO s tariff provisions accepted by the Federal Energy 1

3 Regulatory Commission (FERC) provide the basis for the needed changes by providing a forward-looking mechanism by which the NYISO can evaluate the need for additional capacity market zones and model them in relevant capacity market auctions. With respect to forward-capacity markets, or adopting significant aspects of PJM s or ISO-NE s capacity markets design, FTI generally concluded that the potential risks and drawbacks associated with such mechanisms outweighed the potential benefits of pursuing such models at this time. FTI recommended against the NYISO eliminating its capacity market or implementing dramatically new capacity market approaches such as forward market mechanisms, preferring instead to see the NYISO make changes at the margin to its existing structure. FTI recommends a number of modifications that, in its view, would improve the performance of the NYISO s capacity market. A summary of these recommendations and NYISO s response to each is provided below. FTI Recommendation: Based on a lack of any compelling benefits associated with adoption of forward capacity markets, FTI recommends that the NYISO not pursue implementation of multi-year forward capacity markets at this time. NYISO Response: NYISO concurs with FTI s recommendation and the rational provided by FTI for this recommendation. While concurring with FTI s recommendation, the NYISO is open to exploring the merits of an annual mandatory capacity procurement with its stakeholders. FTI notes that such an approach would likely reduce or avoid many of the concerns and complexities it identified in moving toward a multi-year forward market while also lowering transition costs. However, FTI notes that many of the benefits associated with a multi-year forward market will likely be diminished in an annual forward market as well. The NYISO is willing to evaluate with stakeholders whether an annual mandatory procurement can offer enough of the benefits of improved visibility without some of the challenges and hurdles identified by FTI in moving toward a longer-term forward capacity market. FTI Recommendation: NYISO should implement a routine process, such as the one presently in its tariff (outlined it its November 7, 2011 compliance filing, and accepted by FERC), for identifying potential new capacity zones and modeling them in capacity market auctions prior to the time that they are needed to support reliability and ensure efficient outcomes in the capacity market. NYISO Response: The NYISO concurs with FTI s recommendation and its conclusion that, if applied in an appropriate manner, the existing design establishes a routine and rational basis for evaluating the need for new capacity zones. This approach should provide the ability to model such zones in advance of the time that they are needed to address reliability concerns. The process provides for the implementation of a new capacity zone in 2014 following the demand curve reset process, and discussions about the exact nature of the proposed new zone are ongoing in the NYISO stakeholder process. FTI Recommendation: To address local reliability issues, NYISO should seek greater reliance on energy market and ancillary service revenues (as opposed to administrative rules and requirements in its capacity market) to support needed capacity resources and capabilities. In support of this, the NYISO should evaluate reserves pricing during demand response activations and consider other reliability 2

4 requirements that may not be appropriately priced in the energy and ancillary service markets as a way to avoid the need for smaller capacity zones. NYISO Response: The NYISO concurs with FTI s recommendation and has committed to a comprehensive review of the scarcity pricing regime in 2014, including an evaluation of reserves pricing during demand response activations. Further, the NYISO s review will include consideration of reliability requirements that may not be appropriately priced in the energy and ancillary service markets in an effort to enhance market efficiency through improved price signals. While the capacity market is designed as the primary mechanism to ensure resource adequacy, the NYISO agrees with FTI that there may be opportunities to address localized reliability needs by shifting revenues from the capacity market to the energy and ancillary service markets in a manner that more accurately reflects the reliability benefits associated with resources participating in these markets. One of the NYISO s goals is to operate markets in a manner that reflects maximum economic efficiency. To the extent that administratively established prices or requirements for certain resources result in less efficient system dispatch than might be otherwise achieved, the NYISO is willing to work with stakeholders to design improved price signals in its energy and ancillary service markets in a manner that enhances market efficiency. FTI Recommendation: NYISO should develop a demand curve for installed capacity that reflects a reasonable assessment of the incremental reliability value of capacity by improving (increasing) the slope of the demand curve in the range of capacity shortfalls to align with the actual reliability value of this capacity. NYISO Response: The ICAP demand curve reset process includes a review of the slope and shape of the demand curve. This process will give NYISO stakeholders the opportunity for input into the slope and shape of the demand curve. FTI Recommendation: Rather than mitigate new entry, NYISO should consider an Alternative Price Rule (APR) type of structure, similar to one previously proposed in New England, to allow load serving entities to self supply without suppressing the capacity market price. NYISO Response: The NYISO currently does not have any plans to pursue the APR structure suggested by FTI given existing priorities and commitments. The goal of the referenced APR is to retain accurate capacity price signals by preventing artificial price suppression due to any bidding strategies by suppliers that do not reflect a market-based, or competitive, cost of entry due to the existence of contracts or subsidies that ensure full payment for the resource regardless of the capacity price paid. As described by FTI, the APR would essentially establish the price that would have prevailed if the out-of-market resource had submitted a competitive offer, one that reflects the resource s full cost of entry, into the capacity auction. While FTI s recommendation has merits, as FTI notes in its report, the ISO-NE s APR proposal was previously rejected by FERC, creating uncertainty over whether a similar approach tailored to New York s markets would receive regulatory approval. Given such uncertainty, the level of resources and effort it would take to develop a similar approach for FERC to review, and the number of competing priorities the NYISO must balance, we believe this recommendation is best left for future discussion and stakeholder input. 3

5 FTI Recommendation: NYISO should consider exempting from buyer-side mitigation new resources not associated with any entity possessing buyer-side market power, just as there is a similar exemption in the seller market power mitigation rule for resources controlled by entities lacking seller market power. NYISO Response: The NYISO concurs with this recommendation and is currently pursuing an exemption from buyer-side mitigation for merchant projects through the stakeholder process. The NYISO is open to similar additional exemptions for entities that lack buyer-side market power, such as small municipal load serving entities discussed in FTI s report, and is willing to work through the stakeholder process to more clearly define and codify such exemptions. FTI Recommendation: NYISO should not extend its current capacity market to include capacity payments for permanent reductions in load (i.e. for the impact of energy efficiency investments on peak demand). NYISO Response: The NYISO concurs with FTI s recommendation to not allow permanent load reductions, such as those achieved through energy efficiency measures, to participate in the NYISO s capacity markets. The NYTO load projections, used to establish ICAP requirements, already include estimates of expected load reductions from energy efficiency measures. Actual load reductions are reflected within one year. Therefore, all retail customers receive the benefit of permanent load reduction measures in the form of lower capacity prices that result from reduced demand due to increased efficiency. Furthermore, capacity markets are designed to preserve reliability by ensuring sufficient resources are available and can be called upon when needed to meet load. Investments in generation, transmission, and demand response resources all have the ability to meet load if and when needed. While energy efficiency investments provide long-range reliability benefits by suppressing demand, such investments do not represent dispatchable resources that can be called upon to resolve real-time reliability concerns. As noted above, the reliability benefits associated with investments in energy efficiency are already accounted for in the ICAP market in the form of reduced ICAP requirements. FTI Recommendation: With respect to the New York ISO s market power mitigation design for buyer market power, an issue that remains is the assumption in calculating the impact of entry that the supply of demand response is completely price inelastic. This assumption could potentially have a significant impact on the outcome of the test if the role of demand response increases. FTI recommends that a more accurate approach be developed in the long run. NYISO Response: The NYISO agrees that the issue of the price elasticity of demand response supply warrants further examination. While not a high priority concern at the existing demand response penetration levels, the NYISO anticipates that demand response will continue to play a role in our capacity market and agrees that improved demand response assumptions will produce more accurate price signals and more efficient market outcomes. Given the existing level of demand response in the market and the number of ongoing priorities and projects however, this effort will be reviewed carefully with stakeholders during the project prioritization process. Conclusion The NYISO is committed to the continuous improvement of its capacity market to ensure the market provides appropriate and accurate price signals to market participants in order to preserve the reliability of the bulk power system in an economically efficient manner. FTI s review of the NYISO s capacity 4

6 market has not identified any compelling need for sweeping or rapid changes to the design or implementation of the market, focusing instead on a series of relatively minor adjustments that it believes will help to produce more accurate price signals and more efficient market outcomes. The NYISO commits to working with its stakeholders to address FTI s recommendations to the extent that resources to do so are available, and to the extent that we concur with FTI that such refinements will produce market and system benefits that outweigh the costs and complications of pursuing such changes. Stakeholder involvement and input, as always, will be crucial to successfully implementing any of FTI s recommendations. The NYISO commits to ensuring any adjustments to its capacity markets are carefully considered in its open and transparent stakeholder processes. i Evaluation of the New York Capacity Market, prepared by Scott M. Harvey, William W. Hogan, and Susan L. Pope of FTI Consulting, February 11,