Resource Adequacy and Markets in New England

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

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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
Market Solutions

• 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

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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

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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 Commissions goals for
  resource adequacy.
• PUC will analyze New York and New England approach