|
Consulting |
Search |
Majority of New England Customers Oppose Capacity Markets
June 24, 2011
Email This Story
More than half of New England customers are opposed to government intervention in resource adequacy, according to a recent survey conducted for the New England Energy Alliance.
The survey, conducted by Opinion Dynamics Corporation, asked customers which of the following two statements about restructured electricity markets is closer to their opinion:
- "The competitive marketplace will provide adequate financial incentives to spur investment in new generating plants and infrastructure projects," or
- "Ensuring an adequate electricity supply is too important to be left to market forces - it should be the responsibility of government agencies as well"
Some 56% of respondents agreed with the first statement that the competitive marketplace will provide adequate financial incentives to spur investment in new generating plants and infrastructure projects
Moreover, 30% opposed making adequate supply the responsibility of "government agencies."
The results can only be interpreted as an indictment of administrative capacity mechanisms, incorrectly called markets, present in ISO New England, PJM, the New York ISO, and, through different mechanisms, the Midwest ISO and California ISO.
Although advocates of capacity auctions have touted the statement as support against state actions which purportedly interfere with the operation of the auctions (e.g. the bidding of long-term ratepayer backed contracts into the auction), this ignores the fact that capacity auctions themselves are government interference in the interaction of buyers and sellers.
But for the direction of a government agency, namely FERC, forward capacity obligations on load would not exist. While the specific megawatt obligations which loads are required to meet may not result from a truly government agency (although RTOs are certainly quasi-public with tariffs which amount to the force of law), they are nonetheless determined not by the interaction of buyers and sellers, but the administrative designs of bureaucratic forecasts and predictions.
Indeed, the capacity obligations should be considered "three year plans" that one might find under a centrally planned economy, as they attempt to divine the most efficient level of capacity through bureaucratic estimates.
Also telling is that the capacity obligations originally resulted precisely because FERC believed that the competitive RTO marketplaces would not, "provide adequate financial incentives to spur investment in new generating plants," and thus created an obligation for load to provide supplemental payments to capacity owners.
Furthermore, although the capacity clearing price may ultimately be determined by "competing" offers (heavily regulated and mitigated) among different sellers, the establishment of a uniform clearing price has, in and of itself, robbed load of their ability, outside of a government-run construct, to value capacity at different levels reflecting their preferences.
Absent a government rule which treats all capacity equally, load (assuming they are even forced to meet a capacity obligation) may logically value previously installed capacity at a steep discount to new capacity, because the assets are highly depreciated with relatively smaller going forward costs. Certain types of capacity (baseload, renewable) may also be valued differently by load, but government intervention prevents these market forces from working.
This is especially important since capacity is only part of the cost of electricity, and plants with the cheapest installed capacity may not produce the cheapest energy prices. Indeed, older plants, which are typically less efficient in production and thus generate much higher per megawatt-hour energy prices, will tend to have lower capacity costs due to depreciation.
In contrast, the development of new, highly efficient plants which would produce energy at much lower per megawatt-hour rates (thereby saving customers in the long-run) can be stymied by the government-dictated capacity auction, since these new assets will have much higher, upfront fixed costs. Under new federal regulations, these new assets must completely reflect all of these costs in their initial capacity bid (preventing them from clearing the market), even though the asset owner may be willing to accept lower capacity prices under the expectation that fixed costs will be recovered over time due to LMPs which are expected to be higher than the asset's own marginal costs.
Email This Story
Copyright 2010-
Be Seen By Energy Professionals in Retail and Wholesale Marketing
Run Ads with Energy Choice Matters
Call Paul Ring
954-
|
Consulting |
Search |