Let the (Capacity) Market Decide?

Governor Arnold Schwarzenegger nudged regulators last month to accelerate their pace to ensure there are enough megawatts to sate the state's hunger for electricity. To reach that goal, known as "resource adequacy," either new power plants need to be built, or vast amounts of conservation must be tapped. However, there's no money available to build plants because lenders see too much risk in electricity markets and won't loosen their grip on capital. Utilities would step in to build those plants themselves, but policy makers and some politicians with long memories are uncomfortable with a return to the cost-plus days of cost-of-service ratemaking. If utilities do build the new plants, they want to be assured they won't end up with stranded assets. So what's a megawatt-hungry, capital-poor state to do? A partial answer to this, say some, is to develop a capacity tagging market. The market would trade in megawatts to be used to satisfy the state's 15-17 percent reserve capacity. With a capacity tag market, policy makers would be assured that there is a place for competitive megawatts to go without risking ratepayer investments in too much supply. The cost of that supply would be addressed ahead of time with price bands so they wouldn't need after-the-fact reasonableness reviews. For politicians, a capacity market could provide incentives to take care of supply shortages for the next few years, giving them some breathing room to develop long-term energy policy. What's in it for ratepayers? It appears that some of the market costs would be contained outside of cost-of-service. Proponents say a capacity tagging market could satisfy the California Public Utilities Commission's 15-17 percent reserve requirement. The problems associated with ensuring resource adequacy are so thorny the commission put off compliance. In the CPUC's January decision, a compromise was made to wait to begin the reserve requirements until the beginning of 2008. This was a rejection of generators' and the California Independent System Operator's (CAISO) preferred action-beginning the requirement in 2005. The governor prodded regulators last month to put resource adequacy back on the policy front burner (probably at the behest of the new energy czar, Joe Desmond, but that's another story). Tagging proponents believe that social goals could be addressed. The capacity tag market could help fund new power plants and reduce the potential for stranded assets. For instance, conservation could be increased. Bids could not only be for megawatts that are produced, they could be for demand-response aggregated in 1 MW increments. Generators could be assured a year ahead of time that a certain amount of their megawatts could be spoken for even if they don't have long-term contracts with utilities or the state. While the auction would be held once a year, it would be based on a three-year horizon. This could free up some capital to build new power plants because it would make bankers a bit more comfortable about lending funds. Bankers would know that, for at least part of the production of a new plant, there would be a year-ahead commitment for payments and three years of forecasts. Both the Silicon Valley Manufacturing Group and San Diego Gas & Electric have capacity market proposals. They basically boil down to this: An annual auction for 1 MW capacity "tags" that looks out three years for a strike price level. The price would be capped. Negawatts would be acceptable. Those who bid have to supply the bid number of megawatts (or negawatts) when called upon. As power plant capacity changes with age and other extraneous problems occur, fudging would be acceptable to some predetermined point, but the megawatts would have to be delivered nonetheless. Payment would be settled after delivery. A centralized administrator, such as CAISO, would take the bids and dispatch the energy. The market could start almost immediately. SDG&E's plan would have the auction broken down into both a capacity and an energy tag, instead of just capacity. Another primary difference is that SG&E would have a real-time call on the energy, while the Silicon Valley group would have the commitments made day-ahead. Some of you may snark that this would be adding another market for a state with a bad reputation. There are worries that suppliers could enlist in the auction but when the time comes for them to be called upon they could simply go AWOL and send their juice to greener pastures. That's probably the primary question about creating the market. But there are many more details that would need to be worked out. For one, everyone assumes CAISO will take on the role of administrator. "We're really not interested," replied Steve Greenleaf, CAISO regulatory policy director. He said all CAISO's resources are dedicated to finishing market redesign. There doesn't appear to be much enthusiasm for a new state-mandated agency like the California Power Exchange. Private exchanges are a possibility. For two, the CPUC would have to work out a myriad of forecasts and details, and regulators are not known for speedy delivery on such matters. The first quarrel will probably be the definition of a "tag." Sounds easy, but it won't be. For three, the Federal Energy Regulatory Commission would have to approve it all. FERC is quite interested?sending a staffer to a CPUC-sponsored workshop on the matter this week. Finally, those who want to make money on this market would have to come to some sort of agreement on penalizing themselves if they don't own up to their promised megawatts when called upon. Thus, the market can't start immediately, in spite of proponents' best intentions. If the details get bogged down in anything like the market redesign components promised originally by CAISO in 2002, then it's pretty hopeless. But if generators are willing to bet on a little income instead of a lot of profits, if conservation aggregators can appear from the sidelines, and if an organization is willing to host the market, then there's a chance. Seems like the only entities without risk in the plan are utilities. Perhaps I'm missing something, but I don't see how it can wind up in some terrible market fiasco. I mean, what else is a capital-poor, megawatt-hungry state supposed to do?

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Let the (Capacity) Market Decide?

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