Presentation to Texas PUC

1
Presentation to Texas PUC

• MARKET CONDITIONS, AND AN ICAP REQUIREMENT
• - Dr. Daniel P. Maserang -

2
Energy-Only Market Conditions

• A competitive, energy-only market should provide
  market signals to produce the appropriate
  generation, if
• Obligation to Serve is terminated
• Load chooses and pays for differing reliabilities
• Load chooses and pays for differing price risks
• ? Load is curtailed for economic reasons
• ? Reliability may be less than once in ten years
• Energy prices are free to reflect supply/demand
• Long-term forward markets reflect desired
  reliability
• Short-term forward and spot markets have scarcity
  rents
• ? Prices higher than marginal unit
• ? High spot prices for extended periods
• Market information is available and understood by
  all

3
Energy-Only Market Realities

• The current market conditions are quite
  different
• Terminating Obligation to Serve
• Many load segments may be politically unwilling
  or unable to terminate Obligation to Serve
  approach
• Even if accepted on paper, real terminations
  will cause fallout
• Retail consumers will generally not understand
  reliability
• Real probabilities of curtailments
• Long-term implications of not paying for
  reliability
• Floating energy prices
• Retail consumers rarely opt for more expensive
  longer-term contracts
• WSCC/FERC has shown political ability and will to
  interfere in short-term and medium-term scarcity
  rents
• So far, NEPOOL, NYSIO, PJM have been pushed by
  load interfere in fully floating prices
• Generators/Financiers will expect ERCOT to do the
  same
• Information/Understanding lacking at retail
  customer level

4
Information Issues

• Complexity of energy markets at the retail level
• Does Joes Auto Shop understand differing
  levels of interruptible service, or risks in
  real-time energy prices?
• Low return (s/month) for big intellectual
  investment ? Big consumers get economies of
  scale, medium/small consumers may not
• Retail Demand Pricing
• Real time availability?
• Long-term contracts at retail level?
• Grade A reliability priced higher than Grade
  B??
• Curtailing individual consumers, businesses
• Feasible Logistically?
• X suppliers with Y service levels at 24 or 48 or
  1440 periods/day?
• Feasible Politically? Economically?

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Wholesale Supply Issues

• Price feedback is VERY short Supply response
  cycle is VERY long
• Mismatch leads to unstable supply/demand
  equilibrium
• 2 to 5 years to ensure supply when needed
• Most load contracts shorter ? understated demand
• Different than gasoline, natural gas, bananas,
  memory chips
• Short-term elasticity in both supply and demand
• These can be piped, trucked, shipped to region as
  storage and reserve stock get thin and prices
  escalate
• No electricity storage reserves cannot be
  depleted and replaced
• No economic force directly driving long-term
  reserve margins
• Price only competition forces out anything not
  explicitly priced ? need reliability in retail
  contracts
• Low margin, or Medium/small may not be able to
  justify paying for long-term reliability
• Weather/Growth patterns might conceal impending
  problems in energy-only markets

6
Reserve Requirements/ICAP

• Full conditions to drive reliability through
  energy-only markets is absent
• Next best approach is a well designed Reserve
  Requirements obligation (e.g. ICAP, UCAP, etc.)
• Punitive penalties (well above CT costs VOLL?)
  for failure to meet obligations
• Traded market for reserve requirements
• By definition, is always below penalty levels
• If demand participates, will normally be very low
  relative to energy
• At times might exceed CT
• Long-term obligations
• Annual requirement levels
• Mechanisms for even longer-term obligations?

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Review Questions

• Is a reserve margin requirement or other
  mechanism necessary in order to ensure continued
  investment in new capacity?
• Question is to ensure appropriate mix of
  generation online, new, existing, or market
  innovations
• Feedback loop too long and price reaction too
  fast to maintain stable supply
• No ICAP might make retirements permanent, not
  just mothballed
• What can we learn from the installed capacity
  market (ICAP) experiences in New England, PJM,
  etc?
• And California!
• Load vs. Generation conflicts causing unstable
  market conditions ? non-optimal investment
• Load not hedging when appropriate if not forced
• Is there any evidence to show that ICAP results
  in the construction of new generation capacity?
• Market players use traded value of
  ICAP/UCAP/Reserves in market evaluations
• Dispatch Model type evaluations underestimate
  optimal mid-merit, and peaker
• What is the impact of ICAP on customers?
• Lower energy volatility, higher reliability,
  higher fixed costs
• What should be the main objectives of an ICAP
  market in ERCOT?
• Produce the economically desired level of energy
  volatility and reliability
• What are the key principles to be followed in
  designing an ICAP market in ERCOT? ?
• If Texas is going to have an ICAP market, what
  are the main ingredients of a successful market?
  ?
• How can we measure success of an ICAP market in
  achieving our objectives? ?
• Are there viable alternatives to ICAP that would
  encourage the construction of new capacity?