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Grid officials say US power capacity markets need to evolve, are not broken

Capacity markets for power in the U.S. are not broken, but they will need to evolve as more zero-marginal cost renewable resources are added to the system and state policy continues to impact competitive markets, grid operator officials and company executives said Oct. 23.

Capacity markets have done a good job in the eastern U.S. at attracting investment in the incremental power generation resources needed to ensure there is ample supply in the markets to meet peak demand and provide a cushion, according to grid operator officials. All three eastern ISO markets have healthy power supply reserve levels, the officials told S&P Global Platts' Financing U.S. Power Conference in New York.

"PJM Interconnection has more excess reserves than the Electric Reliability Council Of Texas Inc. has total reserves … we're about 10,000 MW long," Joe Bowring, president of PJM's independent market monitor, Monitoring Analytics, said during the conference.

ISO New England has also been "quite long" in reserves for many years, "driven in large part by states' eagerness to install energy efficiency, behind-the-meter solar and, to a lesser extent, big subsidized wind farms," said Robert Ethier, vice president of market operations at the grid operator.

Similarly, the New York ISO is long in reserves, running about a 10% margin above the installed reserve margin on average across the state, said Zachary Smith, NYISO manager of capacity market design.

New York's current installed reserve margin is 18.2%, meaning load-serving entities are required to procure capacity equal to 118.2% of their forecast peak load, Smith said.

Market evolution

Speakers told the conference that capacity markets are functioning but not without challenges.

"I think we're at a turning point in capacity markets where states need to decide whether or not they want a competitive market or choose individual winners and losers in that market by choosing which resources to select," said Sherman Knight, president and chief commercial officer of generator Competitive Power Ventures.

As a power plant developer in that scenario, the company would probably pivot by hiring lobbyists to try getting individual supply contracts from states, Knight said, although he believes that competitive markets built around attributes everyone can bid on would be preferable.

One such attribute could be emissions-free generation, the speakers agreed. NYISO has put forth a proposal to price carbon dioxide emissions into the wholesale power price. PJM is studying how that concept could work in its markets, while ISO-NE's Ethier said that having long been in favor of carbon pricing without state support, the ISO has no mandate to develop such a regime.

"When you hear the capacity market is broken … at the bottom, what we're talking about is trying to value this carbon externality in the marketplace," said Jason Barker, Exelon Corp.'s director of wholesale market development.

Flexibility and the ability to ramp power production up and down is another attribute that capacity markets could value as they evolve, Barker said. As more intermittent resources are added that need flexible resources behind them, valuing flexibility will be increasingly important, Barker said.

"I don't think it would be a good thing for the capacity markets to go away in the near future," Knight said. The markets need to evolve, but how they do that in a way that supports the grid of the future is a little unclear, Knight said.

NYISO is trying to figure out how its markets will function as the state works to meet recently enacted state goals that include 100% clean power by 2040. A lot needs to happen to get from about 28% renewable energy capacity today to 100%, Smith said.

"It's frustrating hearing capacity markets are not working because, in New England, we have proof they actually do work," Ethier said. The grid operator has had six large generation projects clear in the capacity market in recent years and come online on a purely merchant basis, Ethier said.

Bowring agreed, saying PJM has demonstrated that capacity markets work "incredibly well." In the last seven or eight years, 30,000 MW of coal-fired capacity has retired and was replaced by gas, and roughly 80% of all generation built in PJM since 2007 was entirely merchant driven, Bowring said.

PJM auction delay

Asked to comment on when PJM may run its next capacity auction after not running one this year due to federal regulatory delays, the panelists had mixed views.

Knight said he would be "shocked" if there was not at least one auction in 2020. However, Barker said it could take even longer because states may need to enact legislation to comply with the pending Federal Energy Regulatory Commission ruling.

Estimating how long instituting new laws could take and adding the nine months needed to prepare for capacity auctions within the PJM process, Barker said there may not be an auction in 2020 "if we are serious about accommodating states."

Jared Anderson is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.