Experts discuss reform of the capacity market in the United States and the need for a new ancillary services product

Strong points

The increase in renewables will lower electricity prices

Debates on the best ways to induce flexibility

As wholesale electricity markets in the United States absorb more renewable energy resources, market design experts expect capacity prices to decline and there is debate within industry on whether there should be an ancillary service product to encourage flexibility.

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“Let’s be clear, capacity market prices will go down [after changing the minimum offer price rule] and state policies will affect other states, ”said Joe Bowring, president of PJM Interconnection market monitor, Monitoring Analytics, at a May 27 panel discussion at the S&P Global Platts Northeast Power and Gas Markets virtual conference .

The Minimum Offer Price Rule, or MOPR, has been adjusted by federal regulators in recent years to prevent the compression of electricity prices in capacity markets due to the increasing volume of renewable energy resources benefiting from state-level grants. However, states that are pushing renewables to tackle climate change and renewable energy advocates have pushed back on MOPR, which in its current form will prevent subsidized resources like offshore wind from offsetting in upcoming auctions. capacity.

Bowring agreed with other panelists that the effective carrying capacity of renewable energy resources needs to be calculated accurately, but this is complicated. PJM is currently working to correct its ELCC proposal after its initial plan was rejected by the Federal Energy Regulatory Commission. The AGJE is a means of assessing the capacity contribution of intermittent renewable energy sources that have lower capacity factors than traditional baseload power generation resources.

“The marginal value of renewables decreases as you add them … and with more and more renewables on the system, their contribution to capacity will go down in megawatts and the price of capacity will go down.” and it is essential that AGJE report on this, ”he said.

The increase in renewable energy capacity will also bring zero marginal cost energy, which means that the cost and price of electricity will also tend to fall for many hours, Bowring said.

And resource flexibility, like the ability to move up and down quickly, does not require new products, he said, adding that more closely following existing market rules would help increase flexibility.

Recently, nearly a majority of states in the Eastern Regional Transport Organization region have declared 100% clean energy goals or requirements, meaning the states will be responsible for 100%. megawatt hours of energy sold and delivered to customers. clean energy, said Travis Kavulla, vice president of regulatory affairs at NRG Energy.

The transition to that future will have significant impacts on the quantities and prices paid for increasingly less frequently shipped assets needed for reliability, he said.

Debate on ancillary services

One thing that makes markets successful is having a fungible product and that’s a challenge in wholesale electricity markets when it comes to assets that have different properties, said Marji Philips, Vice President of Wholesale Market Policy at LS Power.

The existing resource model has worked by broadly defining each resource’s contribution to reliability, which allows market players to negotiate around and fund it, she said.

“It’s hard to get financing on an ancillary service… I can’t go into a bank and say fund my asset, but I don’t know what the rates will be on ancillary services,” Philips said.

And in PJM, some ancillary service markets have become so oversaturated that the value has declined rapidly, “so we don’t think creating special services for flexible units makes sense, we think it makes sense to refine. defining what a resource may need to qualify for a capacity payment, ”she said.

Brett Kruse, vice president of market design at Calpine Corporation, generally agreed, adding that one of the reasons financiers did not look favorably on ancillary services was that for decades they were of little value. monetary.

“Flexibility becomes more and more important from year to year, but it becomes very complicated to figure out how you compensate for it,” Kruse said, adding that “the devil is in the details when designing it”.

As a counterpoint, Tom Rutigliano, senior lawyer at the Natural Resources Defense Council, said it was time to invest more money in energy and ancillary services. With the emerging needs for flexibility on a network with a high renewable energy content, “it seems to us that the markets for energy and ancillary services are a better tool to achieve this than the capacity markets”.

And as the money moves from the capacity markets to the E&AS markets, “I think you get much better price signals on the type of investment needed,” said Rutigliano. These markets seem to be the right tool from a political point of view and although they do create some risk, he does not agree that they are not financeable and will not get the necessary investments.

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Christopher Easley

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