MOPR and New Co-generation Capacity August 22, 2017 www.poweradvisoryllc.com CWG Submission to AESO Workgroups
Summary and Key Points The MOPR proposal impedes competition with the sole benefit of higher market prices than would otherwise develop Protecting a market from competition is clearly not in the public interest A Minimum Offer Price Rule (MOPR) for new cogeneration projects is entirely inappropriate for the Alberta market Cogeneration developers do not have an incentive to lower market prices (monopsony power) nor are they subsidized with out of market payments Cogeneration represents a low cost and highly competitive source of new capacity funded entirely by private investment The proposal to apply a MOPR limits the choice of industrial load to supply its own needs in the market and represents a material impediment to achieving the government s policy of incenting low carbon development This concern is particularly true if self supply is not allowed as is being discussed in the Procurement and Hedging Group In this case a new industrial load could build a cogeneration facility, reduce GHG emissions, supply capacity to the market yet be required to purchase incremental capacity from other competitors for its load requirements if its capacity was deemed to not clear the market because of the MOPR 2
Contents This presentation contains: 1. Purpose of a Minimum Offer Price Rule (MOPR) in Capacity markets 2. Reasons against a MOPR for new co-gen 3. Use of MOPRs in other jurisdictions www.poweradvisoryllc.com 3
MOPR on new co-gen In a submission for discussion at the July 25, 2017 market mechanics working group meeting, London Economics, presenting on behalf of TransAlta, stated the following regarding co-generation assets: The CWG fundamentally disagrees with the above noted recommendation for a MOPR review It is further noted that no rationale was provided by London Economics for the conclusion that a MOPR review is required for cogeneration projects the highlighted text is the only mention of a MOPR for cogeneration other than to note some markets explicitly exempt cogeneration from a MOPR 4
Purpose of a MOPR Designed to prevent the exercise of buyer side market power Buyer side market power abuse could be accomplished should a company attempt to suppress market clearing prices via low resource bids, which it might do in order to reduce its total price for a larger volume of capacity purchased Relevant in markets where generation is developed by entities who have an incentive to lower capacity prices Designed to reduce or eliminate distortions from out of market subsidies that artificially lower net-costs E.g. subsidies for renewable generation through the REP Even in US markets the use of MOPR for directly subsidized generation such as renewables and nuclear (zero emission credits) is controversial Norman Bay (former Chair of FERC): The MOPR was designed to prevent "buyer-side market power" from artificially lowering prices, but that term is imprecise and something of a misnomer as it came to represent more than the kind of monopsony power (where there is only one buyer) that does have to be watched for and checked. In the vast majority of situations, Bay believes FERC should just let the costs and benefits of state incentives for resources pass through markets and have an impact on supply and demand. Instead, the MOPR ends up forcing consumers to pay twice once for the resource being "subsidized" by the state and another time for extra capacity if it winds up mitigated at wholesale. 5
Cogeneration Analysis Cogeneration is generally built to either physically self supply an industrial load and/or sell energy and capacity to the market the argument a cogeneration project is developed to artificially supress power prices is outright false for sites that export power and at best spurious for sites that import power as these are small players unlikely to hold monopsony power in the context of the Alberta market In effect the argument that cogeneration uniquely needs a MOPR to prevent monopsony power does not hold As such, the argument for a MOPR on new co-gen rests on the idea of subsidy which is equally misplaced Transmission saving this is not a subsidy but rather a response to in market price signals combined with the desire for increased operational redundancy. The transmission tariff is based on the principle of cost causation so responding to the tariff is explicitly responding to a market based signal that has been put in place for this exact purpose. Carbon policy co-gen may get a credit under the OBA but this is not a subsidy as it is purely based on carbon intensity. CCGT gets a benefit relative to SCGT which gets a benefit relative to coal to gas conversion which gets a benefit relative to coal. The carbon tax is a market based mechanism designed to incent lower carbon resources. This is not a subsidy, but rather the government pricing an externality to achieve a more efficient market outcome. Site load the ability to self contract is not a subsidy as it is a private market participant engaging in private investment decision making. Managing one s own position is clearly not a subsidy any more than cheap capital, attractive generation site, etc. are a subsidy. 6
Reasons against a MOPR for co-gen Major departure from a competitive market The ability for private investors to make choices based on their individual views is fundamental to a market rather than a managed situation All forms of generation, not just co-gen, consider all potential costs and revenues along with perceived risks when making an investment decision. As long as the revenues are market based, this is fair in all cases. Impediment to investment in low carbon baseload co-gen and is contrary to government policy goals of reducing the carbon footprint of Alberta industry Forcing co-gen to offer into the capacity market at administratively determined levels will result in a clear barrier to new entry. The result of this is that higher priced capacity will clear in lieu of the new cogeneration What policy objective does this serve? A MOPR benefits other generators, but not Albertans as noted previously a MOPR has the direct impact of forcing consumers to pay a higher price for capacity than would occur in a competitive market 7
Reasons against a MOPR for co-gen Increases the overall costs to Albertans of investments that will lower Alberta s carbon footprint At worst, a co-gen could be built to serve a load regardless of the lost revenue in the capacity market. In this case, the co-gen would not clear the market due to the MOPR and the load would be left paying capacity to other generators despite the co-gen behind there, leaving Albertans with higher bills. Contrary to the intention of deregulation Deregulation allows low cost generation to be developed to the benefit of consumers Deregulation allows private investors to realize the risks and rewards of their investments Deregulation allows power consumers the ability to manage their exposure to the market, including the right to physically self-supply power at their own discretion A MOPR moves low cost generation higher up the capacity market merit order, putting Albertans at risk of not buying the lower cost asset and favoring more costly alternatives that are not subject to a MOPR Restricts the ability to seek out niche opportunities Generators considering new investments will see the market differently given the risk that the AESO may deem the advantage unfair and apply a MOPR. 8
Background on legislation Alberta has developed legislation enabling the development of cogeneration. Imposition of a MOPR would be counter to the spirit and intent of this legislation. EUA Section 2 b) exempts energy produced and consumed on a property from the EUA EUA Section 5 provides for fair and open and non-discriminatory competition, not distorted by unfair advantage, to guide investment decisions by a competitive market FEOC Regulation sets out conduct not supporting a competitive market - Section (h) restricting or preventing competition, a competitive response or market entry by another person Imposition of a MOPR would create an unfair advantage, discriminate specifically against new cogeneration and reduce investment in cogeneration by reducing and restricting competition in the market Section 4 of the HEEA sets out the foundations for Industrial System Designation (ISD) such that; The granting of an ISD sends appropriate economic signals to develop self-supply ISDs create efficient and improved exchange of supply within the AIES AUC Rule 007 adds further clarity to the above requiring an estimate of improved efficiency through reduction of losses and congestion for electricity exchanged with the AIES Imposition of a MOPR would interfere with economic signals for industrial consumers to develop their own supply and significantly reduce benefits and efficiencies to the AIES 9
Jurisdictional review - MISO There is currently no MOPR in MISO. The FERC claims that, unlike in PJM, the MISO does not have participants that could clearly benefit from suppressing clearing prices using their generation assets. This is consistent with the types of incentives that exist in the Alberta power market Applicability: Assuming BTF generation is able to operate net-to-grid, as proposed in SAM 1.0, then co-gen owners would be self-supplying the majority of their own load and many are exporters to the grid that clearly do not benefit from lower prices There is no clear benefit to a co-gen owner from suppressing clearing prices using their generation assets Borrowing from MISO would suggest that a MOPR for new co-gen is not required 10
Jurisdictional review ISO-NE MOPR s apply to all new assets in ISO-NE with the exception of a small amount of renewable capacity New England does not have MOPRs apply to specific subsets of the industry Prevents assets from clearing an auction at prices below their deemed cost structure Implies new capacity cannot take a divergent view Express purpose per ISO-NE documentation is to address the concern that buyers of capacity may have the ability and incentive to suppress prices below competitive levels by subsidizing new entry https://www.iso-ne.com/static-assets/documents/2017/02/2017-02-16_fcm_offer-pricedevelopment-presentation.pdf Note that in ISO-NE LSEs hold the capacity obligation Alberta does not share the same LSE market structure and therefore the rationale for a broad MOPR does not apply in Alberta Substantively all new entry in Alberta is on a competitive basis 11
Jurisdictional review - PJM PJM implemented a MOPR in 2006. The FERC found that the RPM market design (capacity market) would be vulnerable to buyer-side manipulation and the structure of RPM was such that a mitigation mechanism like the MOPR is necessary. Generally all new natural gas generation is subject to the MOPR In 2013, PJM proposed narrowing the list of resource types that would face a MOPR and establishing categorical exemptions for competitive entry and self-supply resources, i.e. co-generation is exempt Applicability: Co-gen facility are generally built for self-supply purposes As noted previously, the Alberta market is not vulnerable to buyer-side manipulation by co-generation facilities Borrowing from PJM would suggest that a MOPR for new co-gen is not required Also suggests a MOPR is generally not required as the market structure in AB does not create the incentive for buy-side manipulation and if buy-side manipulation was suspected it could be dealt with on a case by case basis 12