ACCIONES DE LA SSPD

Power system security depends upon the resources that are actually available during peak periods rather than upon the resources that promise to be available. In particular, security is not enhanced by a generator that is out of service when reserve margins are tight, nor by demand-side resources that do not reduce load when needed. Consequently, capacity prices should reward actual availability both as a matter of efficiency (to encourage resources to be available when needed) and as a matter of fairness (so that consumers are paying only for capacity that has real value and not for capacity that does not perform).

Accordingly, Peter Cramton (of the University of Maryland) and Steven Stoft have proposed to reward only that “capacity that contributes to reliability as demonstrated by its performance during hours in which there is a shortage of operating reserves.”103 _{Key elements of their}

proposal include the following:

 Capacity prices should be based upon actual capacity rather than bid capacity. This prevents the withholding of capacity that would allow an exercise of market power.

 Capacity payments should be based upon the capacity price net of the actual energy rents rather than the theoretical energy rents of a benchmark peaking unit.104 _“Energy

rents” are the energy and reserve profits of the benchmark peaking unit during the hours when there is an operating reserve shortage. Setting capacity payments in this manner would improve the price signal and would also limit the exercise of market power.

Joseph Bowring, the Independent Market Monitor for PJM, has concerns similar to those expressed by Cramton and Stoft. In particular, he has testified that PJM pays resources for their capacity even in cases “of complete nonperformance” and that PJM’s “Wind, solar and hydro generation capacity resources are exempt from key performance incentives.”105 _{He further}

notes that PJM’s resource performance measurements are faulty because they “do not correctly measure actual forced outage performance because they exclude some forced outages.”106

Having a similar concern, PJM has requested that FERC allow it to change the rules governing its capacity market so that PJM can limit the amount of capacity outside the PJM territory that can

103 _{P. Cramton and S. Stoft, “A Capacity Market that Makes Sense,” Electricity Journal 18: 43-54, August/September}

2005.

104 _{Cramton and Stoft acknowledge the difficulty of estimating the energy rents of an actual benchmark peaking}

unit in practical situations, such as when the unit has startup costs or a minimum start time that make a startup decision non-trivial.

105 _{Comments of the Independent Market Monitor for PJM, Centralized Capacity Markets in Regional Transmission}

Organizations and Independent System Operators, before the Federal Energy Regulatory Commission, Docket No. AD13-7-000, January 8, 2014, p. 5.

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bid into its capacity auctions.107 _{Oddly, PJM’s forward auctions recognize locational constraints}

that limit the delivery of capacity within PJM, but not the locational constraints that limit the delivery of capacity to PJM from areas outside of PJM. Indeed, PJM does not recognize capacity import limits in its capacity auctions. With the tripling of capacity imports over the past six years and occasional curtailment of firm transmission service by neighboring power systems, this failure to recognize deliverability constraints attaches too high a value to the reliability benefits of capacity imports. This is yet another instance in which the real value of capacity is less than its nominal value.

ISO New England has recognized the fundamental principle of “pay for performance” in its recent proposal to FERC to amend its Forward Capacity Market (FCM) design. As ISO NE states:

When sellers can depend on payment regardless of the quality of the product delivered, quality tends to suffer. When payments reward higher quality, quality tends to improve. While there have been many efforts to refine the FCM over the years, its design has always failed to reflect these most basic principles, and reliability in New England is deteriorating as a result.

Much of the reason for the FCM’s failure in this regard is its complexity. The product is poorly defined; while the region requires resources that reliably provide energy and reserves when supply is scarce, the FCM instead buys something only vaguely related to that, called “availability.” The FCM applies different rules and different standards to different types of resources (even though it seeks to buy the same product from all of them), and includes numerous one-off provisions and exceptions. And at the end of the day, capacity “obligations” mean little because there are rarely financial consequences for failing to perform.

Each of these elements of the current FCM is contrary to sound market design. This is not surprising, however, because the core FCM design was not based on any standard market model. Rather, the FCM was built from the ground up, without a blueprint, through a long series of negotiations and compromises. The result is an idiosyncratic design that is failing to meet its most basic objectives – ensuring reliability in a cost-effective manner. The solution to these problems is assuredly not more of the same. The FCM design must be fixed on a fundamental level.

The Pay For Performance design presented here replaces the FCM’s esoteric design with one that is familiar. Pay For Performance is a true, two-settlement forward market, following a blueprint that has been tested, refined, and applied successfully in myriad other markets, including New England’s own energy markets. Pay For Performance is built around a well-defined product – the delivery of energy and reserves when they are needed most. Its rules are much

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more simple than the current FCM design, and those rules apply in the same manner to all resource types, without exceptions. With greater transparency and less uncertainty, Pay For Performance will create strong incentives for resource performance consistent with the goals of the capacity market.108

In summary, resources should be compensated for their capacity value only to the extent that they can support power system security when needed. Resource owners will have good incentives to perform only if they are paid for resources that are actually available when needed; and they should be penalized, or at the very least not paid, if their resources are not available when needed. This obvious reform should be undertaken expeditiously in all capacity markets that have a mismatch between rewards, penalties, and performance.