Comparison Matrix of Existing Capacity Market Attributes: RPM & FCM

Transcription

1 Comparison Matrix of Existing Capacity Market Attributes: RPM & FCM RPM / PJM FCM / ISO-NE Qualification for Existing Resources Qualification for New Resources Procurement cycle Commitment Term Base Auction Mechanism Eligible units must meet the generation deliverability test and perform winter and summer testing to verify net capability. Appropriate rules also apply to existing demand resources. A planned generation unit must be online at or before the start of the delivery year and have an executed Facilities Study Agreement and an Interconnection Service Agreement. Appropriate rules also apply to planned demand resources Base Residual Auction (BRA) that is held three years prior to the start of the Delivery Year. The Persistence Pricing alternative for new generation allows for commitment up to three years. For existing resources the commitment period is one-year in length. Variable Resource Requirement i.e. a sloped demand curve with maximum price (1.5 net- CONE) set at IRM 3%, net-cone at IRM + 1%, one kink at IRM + 1% and another at IRM + 5%, and zero-crossing point at Potential sellers submit qualification materials including the location and capacity resources. Any resource that seeks to withdraw capacity ( delist ) above 0.8 x CONE must justify its bid A new resource must submit a show of interest, satisfy credit terms, and demonstrate its physical availability at the start of the delivery period Pre-qualification starts approximately four years prior to the first delivery month. While initially a shorter period, the auction will eventually be held 3.5 years in advance of the delivery period. New resources may select a commitment period of up to five years. Existing Resources are procured for a one-year term Descending-clock auction to purchase a fixed requirement i.e. a vertical demand curve. The first round begins 2 x CONE and price falls until no excess supply exists. In the first three years there is a floor price of 0.6 CONE. There is also a variable

2 Reconfiguration Auction CONE CONE Reset Energy and Ancillary Services Offset IRM + 5%). VRR curves established for PJM Region and each constrained Locational Deliverability Area (LDA). Three incremental auctions with the first (23 months prior to delivery) and third (4 months prior to delivery) being balancing auctions conducted based on bidbased demand curves. The second incremental auction (13 months before the delivery year) is held to accommodate changes in load forecast. This auction is based on a vertical demand curve. Empirical study by thirdparty consultants determine levelized annual cost in ICAP $/MW-Day of a reference combustion turbine to be built in a specific location. An administrative process involving consultant services estimate the levelized cost of a peaker. Net Energy & A/S offset is calculated using the historical averages of Energy &Ancillary Services revenue data for a reference combustion turbine. During the first three delivery years, it is calculated using a requirement for replacing existing resources above the price of 1.25 CONE (the Quantity Rule).. Starting one year after the initial auction, annual reconfiguration auctions to allow for load forecast adjustments, and to facilitate the trading of commitments among suppliers. The reconfiguration auctions remain physical, and exchange of obligation must be made with a qualified resource The initial Cost of New Entry or CONE of $7.50/kW-month was negotiated and not based on empirical analysis. Because the market clears via a descending-clock auction, setting CONE is not critical. Based on a negotiated rule, each successive CONE equals (0.7 x previous CONE) + (0.3 x previous clearing price) This assumes that, on average, the clearing price will be indicative of the marginal, going forward cost of new capacity. Peak energy (and A/S) rents are calculated monthly based on zonal LBMPs for a proxy unit with a 22,000 Btu/KWh heat rate with no start-up costs, no ramp constraints, and no minimum run time. A 12-month moving-average of these rents is then deducted

3 Performance Incentives Market Power Mitigation historical average of the six most recent calendar years. Subsequently it is calculated using a historical average of the three most recent years. Credits/penalties associated with peak-hour availability provide incentives for generation to be available during the 500 hours that RPM identifies as being high load periods given that unit was economic based on its cost-based offer price. Units whose availability is less than their EFORd have their capacity payments reduced proportionately. Offers of existing units in an LDA are subject to mitigation based on a conservative market structure screen. Offers are capped if one or more of the following conditions are satisfied: (1) the market share of any capacity seller exceeds 20%; (2) the HHI for all such sellers is 1800 or higher; or (3) there are not more than three jointly pivotal suppliers. Offer caps are equal to unitspecific going-forward costs that are calculated by a template. With regard to buyer market power (monopsony), the PJM RPM market rules contain provisions for minimum offer prices for new resources. This measure, from capacity payments each month. All listed resources are required to offer into the DAM and RTM, if available. In addition, each failure operate during Critical Peak Hours will result a 5% loss of annual ICAP revenues (up to 100% of revenues). Supplier market Existing resources are mitigated explicitly above 0.8 x CONE through delisting requirements that require justification of higher forward costs or opportunity costs to the Market Monitor Permanent Delist bids are publicly reported in advance to encourage new resources and to discourage gaming. The Quantity Rule also mitigates existing market power above at a price above 1.25 CONE by deferring the purchase of replacement capacity until the reconfiguration auction. Buyer market power is mitigated by an Alternate Price Rule, which resets the auction clearing price to the lower of $0.01 less than CONE or the last New Resource bid not selected if purchases from Out of

4 however, has limited effectiveness as LSEs can self-supply at zero price) Market Bids exceed the required new entry. Any offer at a price below 0.75 CONE is presumed to be Out of Market Capacity, unless a bid justification is submitted and approved.

5 Some informative reports and documents ISO-NE s Forward Capacity Market (FCM) 1. Forward Capacity Auction Results Filing March 3, _fca_results_filing.pdf This is ISO-NE s compliance filing to FERC that discusses the outcome of the first FCM auction. 2. Order Accepting Filing ISO New England Inc. Docket No. ER (Issued June 20, 2008) 08_fcm_auction_rslts.pdf In this order, the Commission accepts a filing by ISO New England (ISO-NE) providing the results of ISO-NE's first Forward Capacity Auction (FCA) as well as responds to a series of protests and complaint from variety of stakeholders.. PJM s Reliability Pricing Model (RPM) 1. PJM s Reliability Pricing Model: (Why It s Needed and How It Works) Chandley, J., LECG, Commissioned by PJM Interconnection, March

6 The paper lays out PJM s long-term resource adequacy program which is called the Reliability Pricing Model or RPM. The paper discusses why RPM is needed now to assure the adequate supply of energy in future years and how it is designed to provide the correct market based incentives to encourage the right mix of resources. It also relates how some of the basic provisions of RPM have been developed / considered by other regional transmission organizations / independent system operators. It is written for individuals who have some knowledge of long term resource adequacy proposals. 2. Reliability At Stake: Resource Adequacy Designs and The Success Of PJM s Reliability Pricing Model - Stoddard, R. B., CRA International, under commission by PJM Power Providers, May 5, This paper has two primary goals. First, it discusses why capacity markets exist at all and what their role is in providing reliable, cost-effective power to consumers. Second, this paper examines whether the new Reliability Pricing Model (RPM) developed by PJM is performing reasonably. In particular, it rebuts many of the contentions made in a report recently issued by the American Public Power Association and authored by James F. Wilson of LECG, LLC, entitled Raising the Stakes on Capacity Initiatives: PJM s Reliability Pricing Model (RPM) Contrary to Wilson s claims, this report concludes: Market-based mechanisms that support investment in new resources and retention of needed, economic existing capacity is consistent with both federal and state policies and allocates risk most effectively between consumers and investors Among the market-based mechanisms available in theory, in practice centralized capacity markets are superior to either energy-only or contract-based designs. The PJM RPM design is fundamentally sound; RPM provides appropriate incentives to attract new investment, retire uneconomic existing generation, and retain economic existing resources; RPM will attract an appropriate mix of resource types, including demand response; RPM works with and supports bilateral contracting, including long-term procurements by utilities, states, and other load interests. RPM results in prices within the range of reasonableness and is a cost-effective means for achieving resource adequacy in PJM. 3. Raising the Stakes on Capacity Initiatives: PJM s Reliability Pricing Model (RPM) - Wilson, J. W., LECG, LLC, commission by American Public Power Association, March 14,

7 While the primary objective in implementing RPM was to attract new generating capacity and retain existing capacity to maintain reliability, most of PJM s stakeholders with the most direct interest in keeping the lights on (consumers and their representatives) were opposed to PJM s RPM proposal. PJM s capacity buyers expressed concern that such a complex and highly administrative mechanism would likely be susceptible to unintended consequences, gaming and exercises of market power. However, perhaps the primary concern of these stakeholders was the simple fact that RPM was expected to be expensive, and the vast majority of its capacity payments would go to existing generators, with little or no impact on resource adequacy or direct benefit to consumers, since these resources are already in the market. This paper is a thorough critique of the RPM s performance over the four transition auctions. 4. PJM Interconnection s Comments on Raising the Stakes on Capacity Incentives: PJM s Reliability Pricing Model (RPM) This is a response to Wilson s arguments. 5. Review of PJM s Reliability Pricing Model Pfeifenberger, J. et al., Brattle Group, as commissioned by PJM, June 30, This report, commissioned by PJM, was in response to FERC s direction to PJM to both provide an objective assessment of the RPM s performance and to address issues raised by the RPM Buyers Motion, which the Commission enumerated as follows: 1) whether the higher capacity prices in the first four base residual auctions relative to PJM's pre-auction simulations and reasonable expectations can be fully explained, and what changes a full understanding of these differences would suggest for RPM; 2) whether RPM prices have been instrumental in stimulating new generation, new demand response, or retention of capacity resources that would otherwise have deactivated, and how RPM can more effectively attract and retain capacity resources; 3) whether the "avoidable cost" offer mitigation mechanisms and other administrative mechanisms have been effective in preventing withholding, and what modifications to those mechanisms may be needed; 4) whether the higher prices in certain locations served any useful purpose in the first three base residual auctions and whether they will serve a useful purpose going forward; 5) whether the slopes of the Variable Resource Requirement (VRR) demand curves to determine capacity prices provide inappropriate incentives to withhold capacity;

8 6) whether PJM's administrative mechanisms for setting reliability requirements within local delivery areas have appropriately reflected the need for new capacity, and what changes should be made to reflect needed capacity more accurately; 7) whether RPM's mechanism for determining the net Cost of New Entry (CONE), which uses historical energy and ancillary service revenues, produces prices that accurately reflect the need for new capacity, and whether there are more accurate ways to set capacity prices; and 8) whether RPM supports state initiatives for demand reduction, renewable energy resources, and base load generation, and what modifications may be necessary in light of these state initiatives. 6. COMPLAINT OF THE RPM BUYERS Maryland Public Service Commission, the Delaware Public Service Commission, the Pennsylvania Public Utility Commission, the New Jersey Board of Public Utilities, et al Docket No. EL The RPM Buyers petitioned FERC that PJM s Reliability Pricing Model ( RPM ), as implemented through the transitional Base Residual Auctions ( BRAs ), had produced unjust and unreasonable capacity prices. They claim that the transition period auctions have not achieved the Commission s intended objectives. The absence of price discipline provided by new capacity resources and the ability of existing resources to withhold some capacity within the RPM rules combined to produce capacity prices in the transition period that are not comparable to those that would be produced in a competitive market or determined under cost-based regulation. As a result, customers stand to pay significantly higher capacity charges than justified, but with little discernable benefit, while existing generators will receive an unwarranted windfall. There are three main complaints: First, the transition period auctions lacked an essential element necessary to assure just and reasonable market-based capacity rates competition from new resources, including demand response and new transmission, that could discipline conduct and prices. Second, the RPM s administrative apparatus has proven inadequate during the transition to restrain the exercise of market power by withholding capacity to increase prices. Third, RPM s locational component created additional opportunities for sellers to raise prices while serving no legitimate function during the transition. Fourth, In determining the Cost of New Entry (CONE), which is designed to approximate the cost of building a new peaking plant to provide capacity, PJM offsets CONE by the revenues that plant's owner will earn by selling energy and ancillary services. RPM Buyers claim that PJM's use of historical data to calculate energy and ancillary services revenues results in a value for Net CONE that is too high, since energy and ancillary services revenues have increased dramatically since 2004.

9 These and other core deficiencies have prevented a reasonable outcome during the transition, even if RPM had some meager impact on reliability, its costs far outweigh any possible benefit. 7. FERC Order Dismissing Complaint Multiple Parties vs. PJM Interconnection, L.L.C. Docket No. EL (Issued September 19, 2008) In this order, the Commission denies a complaint filed by RPM Buyers against PJM Interconnection, L.L.C. (PJM) under section 206 of the Federal Power Act (FPA), alleging that PJM's Reliability Pricing Model (RPM) produced unjust and unreasonable capacity prices for the Delivery Years governed by the first four RPM auctions. The Commission accepted certain elements of a proposal made by PJM to replace its existing capacity construct and ultimately accepted the RPM Settlement Agreement (Settlement) to establish a forward-looking locational capacity market. 8. FERC Order On Motion For Technical Conference Docket Nos. ER , EL (Issued September 19, 2008) On March 19, 2008, RPM Buyers1 filed a motion (Motion) requesting the Commission to convene a technical conference to examine the performance of the Reliability Pricing Model (RPM) capacity market construct recently implemented by PJM Interconnection, L.L.C. (PJM). In an order issued on April 17, 2008, the Commission required PJM to provide information in response to the issues raised by RPM Buyers in a report to be filed with the Commission.2 In this Order, the Commission addresses PJM s report, directs further proceedings, and grants RPM Buyers motion for a technical conference.