Report Reveals Investors’ Statements on Market Design Preferences Can’t Be Trusted; Follow The Money
June 02,2015
A report prepared for the ISO/RTO Council on investors' decisions reveals that, while investors continually harp for "market" designs contrived to boost the revenue of asset owners (e.g. capacity markets), they are more than willing to invest their at-risk dollars in markets that do not contain such subsidies, so policymakers should not be held hostage by such investor demands.
Specifically, the report, compiled by Market Reform, lists the following paraphrased dialogue as a "common" one:
Investor: We are strongly in favour [sic] of capacity markets, and capacity revenues are an important contributor to our investment thesis.
Market Reform: But you invest within the ERCOT region?
Investor: Well, yes, they have steady demand growth.
"During the course of the interview process it became readily apparent that despite preferences for various market design features – and investors certainly had strong opinions on these – such considerations were secondary to the fundamental strictures of supply/demand balance," the report concludes.
In other words, when an energy-only market needs supply, investors will build.
"First and foremost, investment is being driven by energy revenues, and investors’ assessments that demand will increase, or in some cases, that supply will decrease (e.g. due to plant retirements related to age, mercury emissions regulations, etc.), thus creating an opportunity for new supply to enter the market," the report states.
"ERCOT was an oft-mentioned example, with a number of investors being active in the region, despite their own stated preference for markets with capacity revenues," the report states
Despite investors' readiness to invest where supply is needed regardless of market design, the report notes that, "investors were strong supporters of capacity markets."
Of course they would be, since the capacity market is an extra payment for something the investors were going to do anyways.
While you might not be able to fault investors' support for an additional revenue stream, that doesn't mean policymakers should put any credence in investors' demands that a capacity payment is in any way necessary for investment