An energy-only market is the most market-oriented and perhaps most efficient approach to resource adequacy issues, outgoing FERC Commissioner Norman Bay wrote in one of his last actions on the Commission

Bay's observation came in two opinions (one dissent and one concurrence) in orders on the minimum offer price rule (buyer side mitigation) in ISO-NE and NYISO, respectively.

"The most market-oriented solution with the greatest transparency, simplicity, and, perhaps, efficiency would be to transition over time to an energy-only market," Bay wrote

"Assuming the scarcity pricing level is set at the appropriate level (the value of lost load), it addresses the 'missing money' problem and eliminates the need for a capacity market," Bay wrote

"But I recognize that it would be a big step for a wholesale market operator to propose an energy-only market – only ERCOT has adopted this design – and that some may be concerned about the politics of scarcity pricing. The trade-off for critics concerned about costs, however, is that there would not be a capacity market," Bay wrote

"A decade ago, in the aftermath of the Western Power Crisis, there would have been little appetite for an energy-only market. Now, however, the wholesale market operators, market monitors, and FERC do much better market monitoring, FERC has an anti-manipulation authority, and natural gas is abundant and low priced, so there should be less price volatility in most regions," Bay wrote

While not noted by Bay, the largest reason cited by parties who should be energy-only market supporters (generation owners who claim to embrace markets and competition) as to why a capacity market is needed in the Northeast markets has also evaporated -- namely, that ERCOT-style offer caps (which for most of the period during which this argument has historically been made has meant $3,000/MWh [prior to the increase in ERCOT]) are unpalatable to Northeast politicians, and thus the capacity market is a necessary evil -- while the so-called free market advocates would ostensibly love to have an energy-only market in the Northeast, such a design isn't feasible politically, and hence the need for a capacity market to preserve organized markets.

As has been oft noted here, with FERC's price formation "reforms" in the RTOs, the argument that this (phantom) political opposition to high energy-only prices drives the need for a capacity market has collapsed as FERC has approved an increase in RTO energy offer caps to $2,000/MWh, with administrative scarcity pricing rules in some markets bringing LMPs close to the $3,000 level which has been proven successful in maintaining an energy-only market for a long period in ERCOT.

If an energy-only market was politically unacceptable in the Northeast, why are energy-only-like offer caps being accepted without challenge? Instead, now Northeast load not only has the risk of high and volatile energy prices under FERC's market reforms, but is paying a capacity payment on top of scarcity pricing.

Turning back to Bay's writings, Bay also suggested that, in the absence of energy-only, a voluntary capacity market would be superior to the current construct.

"Relaxing the MOPR could stand alone as a policy change or it could be coupled with other market designs that better harmonize state and federal policy goals with wholesale markets and promote just and reasonable rates and reliability. One option would be to transition towards a decentralized capacity market with a voluntary capacity auction. Reliability is protected because the wholesale market operator would still have to set a reserve margin; load serving entities (LSEs) would be required to procure the needed capacity. States could play a role here or they could allow their LSEs to rely upon the voluntary auction or sign bilateral capacity contracts. This design provides more flexibility to states and accommodates their choices. It allows states to attach value to energy in a way that the eastern markets do not. It is also fairly simple and straightforward," Bay wrote.

Regarding the minimum offer price rule in capacity markets, Bay said, "the MOPR not only frustrates state policy initiatives, but also likely requires load to pay twice – once through the cost of enacting the state policy itself and then through the capacity market."

Tags:
FERC   Capacity Market   Energy-Only   Texas  

Comment on this story


ADVERTISEMENT
NEW Jobs on RetailEnergyJobs.com
TPV-SALES-EXECUTIVE -- Back Office Provider -- Other
Sr-Market-Risk-Analyst -- Wholesale Supplier/Trader -- New York - New York City Metro
Head-of-Retail-Operations -- Wholesale Supplier/Trader -- Other
Energy-Regulatory-Specialist -- Other -- Other
More Stories on RetailEnergyX.com:
Company Seeks Texas PUC Approval For 'HVDC' Converter Facilities Connecting ERCOT With WECC Grid
ENGIE Files Complaint Against ERCOT '
FERC Orders $230 Million In Penalties Against GreenHat, Related Parties '
Energy Shopping Site Names 2021 'Best Texas Electricity Providers'
Texas Retail Provider Named 'Best Electricity Company In Houston'