Experts debate US capacity market reform, need for new ancillary service product

As US wholesale power markets absorb more renewable energy resources, market design experts expect capacity prices to decline and there is debate within the industry about whether there should be an ancillary service product to incent flexibility.

"Let's be clear, capacity market prices will go down [after changing the minimum offer price rule] and state policies will affect other states," Joe Bowring, president of PJM Interconnection market monitor, Monitoring Analytics, said during 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, was adjusted by federal regulators in recent years to prevent power price suppression in capacity markets from the growing volume of renewable energy resources receiving state-level subsidies. However, states that are encouraging renewable energy to combat climate change and renewable energy advocates have pushed back against the MOPR, which in current form, will prevent subsidized resources like offshore wind power from clearing in upcoming capacity auctions.

Bowring agreed with other panelists that the Effective Load Carrying Capability of renewable energy resources needs to be accurately calculated but doing so is complicated. PJM is currently working to fix its ELCC proposal after its initial plan was rejected by the Federal Energy Regulatory Commission. ELCC is a way of valuing 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 is going to go down in terms of megawatts and the price of capacity is going to go down ... and it's essential the ELCC accounts for that," he said.

Increased renewable energy capacity will also bring zero marginal cost power, meaning the cost and price of power will also tend to go down for many hours, Bowring said.

And resource flexibility, like the ability to quickly ramp up and down, 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 transmission organization region have declared 100% clean energy goals or requirements which means the states will be responsible for 100% of the megawatt hours of energy sold and supplied to customers being matched to a source of clean energy, Travis Kavulla, vice president of regulatory affairs at NRG Energy, said.

Transitioning to that future will have significant impacts on the quantities and prices paid for increasingly infrequently dispatched assets needed for reliability, he said.

Ancillary services debate

One thing that makes markets successful is having a fungible product and that is a challenge in wholesale electricity markets when dealing with assets that have different properties, Marji Philips, vice president of wholesale market policy at LS Power, said.

The existing resource model has worked by broadly defining each resource's contribution to reliability, which allows market participants to trade around it and finance it, she said.

"It's hard to get financing on an ancillary service ... I can't go to a bank and say finance my asset, but I don't know what the rates will be on the ancillary services," Philips said.

And in PJM, some ancillary services markets got so oversaturated that the value declined quickly, "so we don't think creating special services for flexible units makes sense, we do think that it makes sense to refine the definition of what a resource can need to qualify for a capacity payment," she said.

Brett Kruse, vice president of market design at Calpine Corporation mostly agreed, adding that one reason financiers do not look favorably at ancillary services is for decades they have been of little monetary value.

"Flexibility is becoming more important with each passing year, but it gets very complicated to figure out how you compensate it," Kruse said, adding the "devil is in the details with designing it."

As a counterpoint, Tom Rutigliano, senior advocate with the Natural Resources Defense Council, said it is time to put more money into energy and ancillary services. With the emerging needs for flexibility on a high-renewables grid, "it seems to us like the energy and ancillary service markets are a better tool for doing that than capacity markets."

And as money is shifted out of capacity markets into E&AS markets, "I think you get much better price signals about what kind of investment is needed," Rutigliano said. Those markets seem to be the right tool from a policy position and while they create some risk, he did not agree they are unfinanceable and will not get needed investment.