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Resource Adequacy and Markets in New England

Resource Adequacy and Markets in New England. Massachusetts Restructuring Roundtable March 18, 2005. Mark Karl Manager, Market Design ISO New England. Market Considerations. Investment in resources requires market opportunities for investors to recover long-term costs

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Resource Adequacy and Markets in New England

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  1. Resource Adequacy and Markets in New England Massachusetts Restructuring Roundtable March 18, 2005 Mark Karl Manager, Market Design ISO New England

  2. Market Considerations • Investment in resources requires market opportunities for investors to recover long-term costs • Retail customers must see and have a chance to respond to wholesale prices • Development of a viable retail supplier sector • Contributes to long-term supply solutions • Address market power

  3. Resource Adequacy Implications • Wholesale Markets need improved price signals to: • Keep needed plants online • Promote new investment • Encourage customer participation • Retail Markets need improved price signals to: • Encourage efficient electricity use and reduced electricity bills • Reduce price volatility risk

  4. Resource Adequacy Through Wholesale Markets • Competitive Wholesale Markets • Energy Spot Market • Provides short-term price signal for efficient dispatch • Reflects high prices during shortages • Capacity Market • LICAP adds to energy prices during shortages to improve long-term investment signal

  5. Resource Adequacy Through Retail Markets • Competitive Retail Markets • Facilitate long-term contracts through institutional arrangements • Structure of standard offer contracting • Retail aggregators • Adjust retail rate structures • Reflect the real time cost of electricity

  6. Resource Adequacy Challenges for Markets • Challenges to Providing Reliable Long-Term Supply of Electricity • Properly pricing electricity • Difficult to properly price electricity to send long-term signals needed to support investment • Especially in times of shortage • Market Alignment: • Wholesale and Retail sectors must jointly provide prices and frameworks that support long-term investment

  7. Resource Adequacy Challenges: Wholesale Pricing • Energy Market Pricing • Market reserve requirement means energy shortages almost never occur • Properly pricing energy during reserve shortages is very difficult • $1,000 price cap does not allow energy prices to reflect value of lost load • Estimated to be between $10,000 –$30,000 • Capacity Market Design • LICAP proposal address energy market problems • Pays capacity based on on peak performance

  8. Resource Adequacy Challenges: Retail Pricing • Standard Offer Structures • Generally, very short term • Inhibits long-term contracting that encourages investment • Possible options • Allow retail suppliers to create market solutions • Change approach to Default/Basic Service procurement and pricing • Some large customers on competitive supply • Provides opportunities for retail suppliers to enter longer term contracts

  9. Resource Adequacy Challenges: Alignment • Institutional Arrangements can block long-term resource adequacy • Utility obligation to serve has been eliminated, but retail customers have not assumed risk of contracting their supplies • No clear assignment of responsibility for adequacy long term • No incentive to assume responsibility • No incentive to take long term position in the market

  10. MarketSolutions • Improve Elements of Wholesale Markets • Capacity Market (Maine Procurement Proposal, CRAM Initiatives, LICAP) • Direct participation by demand in capacity, reserve, and energy markets • Retail Provider of Last Resort (POLR) procurement options: • Reconsideration of POLR/ Default procurement practices • Eliminate • Modify procurement processes and terms • Real-Time Pricing (RTP) for large customers • Different prices based on peak periods (dynamic retail pricing) options for smaller customers

  11. Resource Adequacy and Capacity Markets in the Northeast • New York • Demand curve and three locational capacity zones • State, through New York Power Authority and Long Island Power Authority, has intervened • PJM • Transitioning from full deliverability to locational capacity market structure • Design Incorporates elements from New England Design and CRAM effort

  12. Other Resource Adequacy Approaches • California • February PUC order: • “Compared to reliability-must-run (RMR) contracts, a capacity market, especially with locational attributes, could provide the CAISO with a more cost-effective means to access the resources it needs, without interfering with LSE procurement.” • “…parties are placed on notice that the Commission staff is undertaking an evaluation of capacity markets and how development of such a market in California might effectively promote achievement of the Commission’s goals for resource adequacy.” • PUC will analyze New York and New England approach

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