Capacity Market FERC Markets

Diverse Coalition Sets Forth Vision for FERC Power Markets

March 7, 2018

By Jennifer Chen, NRDC Alum

Seeking to fix growing problems with certain wholesale electricity markets, an unusual coalition of rural-cooperative and publicly-owned electric utilities, industrial and commercial customers, consumer advocates, renewable energy organizations, and NRDC have joined together in support of a set of principles for market design.

Chief among the concerns spurring the collaboration are wholesale capacity markets (where commitments to deliver electricity in the future are procured) that restrict market participation for storage, wind and solar power, and demand response (the ability for customers to curtail electricity consumption during times of high demand), raising costs electricity consumers pay. These markets also tend to overprocure capacity at consumer expense.

The coalition issued a joint statement to the Federal Energy Regulatory Commission (FERC), which oversees wholesale electricity markets, urging FERC to adhere to five principles as they work through upcoming market design changes. Briefly paraphrased, the principles are that wholesale electricity markets should:

  1. Not focus on or discriminate against any particular technology or resource that is capable of providing a given service.
  2. Respect state and local public policies and resource choices without making customers over-procure resources.
  3. Enable customers and suppliers to more easily transact as they choose through contracts.
  4. Determine prices through market forces and pay resources only for the services they provide.
  5. Reduce barriers to new resources coming online or retiring. Markets should be allowed to stabilize before new solutions are layered on.

These principles apply to any of the FERC-regulated electricity markets, but most of our concern is with capacity markets. Signatories are not looking for the kind of energy market changes that PJM, the grid operator for the Mid-Atlantic and parts of the Midwest, is proposing. Applying these common-sense principles would improve the competitiveness of the markets, allow consumers to purchase what they want to buy at a fair price, and avoid conflict with state and local public policies. Each of the principles—which should be considered together as they are interdependent—are best understood in the context of recent and proposed market rule changes.

1. Avoid discrimination. FERC rightly rejected the Department of Energy’s proposed bailout for uneconomic coal and nuclear power plants. But other rule changes approved by FERC for PJM restrict the purchase of capacity in annual-only commitment periods. This requirement creates barriers to cost-effective wind, solar, and demand response. Even though these resources can reliably commit to delivering electricity during shorter seasonal periods that together cover the full year, they are largely excluded from the capacity market.

2. Respect public policies without making customers overpay. Changes have or will be filed seeking to remove resources favored by state and local public policies from the capacity markets like emissions-free wind power or flexible storage resources. Because customers looking to buy resources like wind and solar may not be able to buy them in capacity markets, customers need a way to procure these resources elsewhere. But some capacity markets require customers to buy a certain amount from them regardless of whether customers have procured these resources elsewhere. This leads to the market buying too much power of the wrong type, which adds costs and shortchanges consumer preference.

3. Customers and suppliers should be able to freely transact. Many of the resources that largely do not participate in the capacity markets, like wind and solar power, secure alternate financing through long-term contracts. But customers are required to purchase capacity from the markets (with exceptions that are difficult to obtain), so customers are often made to purchase duplicate capacity from the markets that they already have through long-term contracts.

4. Prices in the organized wholesale energy markets should be driven by market forces. Capacity markets today are not like true markets due to the artificial constraints that grid operators, such as PJM, impose on them. Markets should provide the opportunity for sellers to receive fair compensation for the services they’ve rendered. But this doesn’t mean that special interests can invent a new service that no one needs and ask to be paid for it (like keeping on-site stockpiles of coal by the power plant when other means of ensuring reliability or “resilience” are more effective).

5. Wholesale markets should reduce barriers to new resources coming online or retiring. With the surplus of capacity, certain generators are complaining about low market prices, but these “low” prices are signals for the least efficient power plants to retire. Rather than retiring, these generators are seeking market rule changes that increase prices that customers would pay. The market should be allowed to function without continuously attempting to prop up prices in order to keep excessive amounts of generation online that should retire.

Each signing organization may have different mandates and thus different approaches on how best to apply these principles. But we agree on these core points and look forward to working with FERC and its regional grid operators to implement market rule changes consistent with them.

The views expressed in this blog are those of the author, and do not necessarily represent the views of the Sustainable FERC Project or Natural Resources Defense Council.