IMM Perspective on Capacity Market
Changes for Competitive Retail Areas
Presented to:
Competitive Retail Solution Task Team
David Patton, Ph.D.
MISO IMM
February 22, 2016
Introduction
• Ensuring that adequate resources are available to serve load is a vital
objective of most RTOs.
• Capacity markets have been developed to assist in satisfying this
objective at the lowest cost.
• The designs of the capacity markets vary substantially from RTO to
RTO, and much debate has occurred regarding MISO’s design.
• This presentation will:
 Review and discuss the role of the capacity market in MISO and the
problems with the current market design.
 Describe the current resource adequacy situation in Zone 4.
 Discuss the changes we proposed to ensure that resource adequacy is
maintained in competitive retail areas.
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The Role of a Capacity Market
•
A well-functioning market that provides efficient price signals would
produce sizable benefits for MISO by:
 Coordinating efficient capacity imports and prevent inefficient exports;
 Supporting a vibrant forward market (bilateral contracts);
 Facilitating low-cost merchant investment; and
 Ultimately, generating substantial savings for MISO’s consumers.
•
Ideally, the MISO capacity market should be structured to achieve these
benefits in all areas.
•
In retail choice states, however, the capacity market is particularly
important to facilitate investment and retirement decisions that will
maintain adequate resources (i.e., satisfy planning reserve requirements).
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Market Conditions Threatening Reserve Margins
•
Major environmental initiatives by the U.S. Environmental Protection
Agency (EPA) has led to the retirement of some older coal units and highcost retrofits of other units.
 The Clean Power Plan and low natural gas prices are likely to accelerate
the retirements in MISO.
•
The MISO capacity market is not currently designed to allow the market
to help MISO to respond efficiently.
 Higher capacity prices in the PJM market has resulted in escalating
levels of capacity exports from MISO to PJM.
 These exports will raise costs to MISO’s consumers by:
–
Forcing additional investment to occur in MISO; and
–
Distorting MISO’s dispatch since the exported units must be
“pseudo-tied” into PJM’s dispatch.
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Current Resource Adequacy Situation in Zone 4
•
•
•
Zone 4 is different than other areas in MISO because it is unbundled and
subject to retail competition.
The “local requirement” for capacity is equal to: the total resource need
minus the import capability into the zone. See the following table:
a Total Requirement in Zone 4
b Capacity Import Limit
c Local Capacity Requirement (a-b)
15/16
11982
3130
8852
16/17
12021
4328
7693
Change
39
1198
-1159
d Total Supply in Zone 4
e Total Supply Net of Exports
Surplus excl. Exports (d-c)
Surplus incl. Exports (e-c)
12944
11994
3142
4092
12945
11122
3428
5251
0
-872
286
1159
This table shows that Zone 4 is currently more than adequate, but concerns are
larger MISO-wide as resources retire and exports to PJM continue to increase.
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Developing a Capacity Market Proposal for
Competitive Retail Areas
•
We recommend the following principles for developing a market design
proposal for competitive retail areas:
1. The market design should produce prices that are consistent with the
reliability value of the capacity procured.
2. The capacity product and obligations should be comparable throughout
all of MISO.
3. The procurement in the competitive retail area should be tightly
integrated and optimized with the procurements in other areas.
•
An efficient market design for Competitive Retail Areas that is consistent
with these principles requires only incremental (but meaningful) changes
to MISO’s current framework.
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Recommended Changes for Competitive Retail Areas
We recommend MISO consider the following design:
•
Introduce a demand curve for the competitive retail area that reflect the
marginal reliability value that additional capacity provides.
 Replace the current “vertical demand” curve with a variable reliability
target (recognizing the surplus over the minimum requirement provides
diminishing incremental reliability).
 The following figures illustrate the differences.
•
Define the capacity product the same as in other MISO areas – same
seasonal definitions and capacity obligations.
•
Establish import limits that reflect not only electrical import limits, but
also an economic limit to ensure an efficient reliance on resources inside
and outside of the competitive retail areas.
•
Procure and price the capacity through the same PRA for all MISO areas.
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Vertical Capacity Demand Curve
• The vertical demand curve
causes MISO’s capacity
market to produce prices:
P
Capacity Requirement
(Vertical Demand Curve)
 That do not reflect the
true value of capacity, so
the market cannot
facilitate efficient
investment and
retirement decisions.
 That are volatile and
difficult to forecast (near
0 when in surplus and
near the cost of building Clearing
a new unit when short). Price
P*
 This volatility hinders
long-term contracting
and investment.
Capacity Offers
Q*
Quantity Cleared =
Minimum Requirement
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Q
Variable Reliability Target
• A variable reliability target reflects the fact that additional capacity above the
minimum does have reliability value (which decreases as the excess increases).
 The price (P*) would be determined by the marginal value of additional capacity
as represented by the demand curve, rather than by a supply offer.
• A variable reliability target will:
P
 Provide more efficient prices that
reflect the prevailing surplus.
 Improve price stability, which
should facilitate investment by
reducing price risk.
Minimum Capacity
Requirement
Capacity Requirement
(Sloped Demand Curve)
Clearing
Price P*
 Reduce incentives to withhold
capacity by raising the opportunity
costs of withholding (foregone
revenues) and decreasing its price
effects.
Q*
Quantity
Cleared
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Q
Alternative Procurement Timeframes
•
NYISO’s and MISO’s “prompt” procurement (immediately prior to the
planning period) facilitates efficient investment and retirement decisions.
 New resources are not offered directly into these auctions.
 However, they still facilitate efficient investment decisions by supporting
forward contracting and long-term decision-making.
•
Some capacity markets (ISO New England and PJM) procures capacity 3
years in advance of the planning period.
 The supposed justification for this “forward procurement” is that it allows
new resources to be offered into the auction.
 The competitive performance of these markets are premised on new resources
being offered competitively.
•
We believe that implementing a mandatory forward procurement in MISO
would raise serious concerns.
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Concerns Regarding Mandatory Forward Procurement
• Forward procurement will not likely facilitate efficient new investment.
 There is no reason to expect that new resources will be offered
competitively at prices close to the annualized “cost of new entry”.
 New resources clear for only 1 year – less than 3 percent of the life of most
resources.
 New resources face substantial risk of completing its entry within 3 years
so many developers commit to entering prior to the capacity auction.
 Those that have not already decided to enter have incentives to offer at
prices well above the cost of new entry since no revenue after the first year
is guaranteed.
 ISOs have implemented revenue “lock-in” provisions to help address this.
– This raises costs by discriminating against existing resources and causing
new resources to inefficiently displace existing resources.
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Concerns Regarding Mandatory Forward Procurement
• Forward procurement will not likely facilitate efficient retirements.
 Suppliers must determine whether old resources will continue to operate for
an additional 4 years (3 years plus the planning year).
 This is not optimal for units facing physical or regulatory uncertainty.
 In prompt procurement markets, old units can operate until they suffer
equipment failure, and can make efficient decisions to mothball or retire
based on the auction.
• Procuring three years in advance also introduces unnecessary costs
associated with the substantial supply and demand uncertainties.
• For all of these reasons, we recommend against MISO introducing a
mandatory forward procurement framework in the competitive retail areas.
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Prompt Capacity Procurement
• Prompt procurement allows the PRA to jointly optimize capacity
procurements within and outside of the competitive retail areas.
• Additionally, prompt procurement:
 Facilitates efficient entry by resources that can enter relatively quickly
(e.g., demand response resources, gas turbines on brownfield sites, etc.);
 Allows competitive retail suppliers to determine whether to purchase
capacity through the auction; and
 Establishes efficient prices that reflect current supply and demand
conditions that will govern suppliers investment and retirement decisions.
• Hence, we believe prompt procurement is an essential component of any
alternative market framework for the competitive retail areas.
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Comments on Other Design Elements
•
We do not believe a Minimum Offer Price Rule will be necessary initially.
•
In conjunction with the prompt procurement:
 We support four seasonal procurements.
 A voluntary forward procurement could be useful if desired by
participants. This could include a forward strip for the year and/or a
multiyear forward.
 MISO should improve its capacity obligations to better handle extended
outages and SSRs so that operable units qualify as Planning Resources
and non-operable units do not.
 Improve the integration of the PRA and attachment Y to better allow
the market to facilitate suspension and retirement decisions.
• We recommend improvements to the physical withholding mitigation
measures related to retirements and the thresholds.
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Questions?