Capacity Markets Investment in Generation Capacity Payments

1
Capacity Markets Investment in Generation
Capacity Payments

• October 31, 2005
• J. W. Charlton

2
Objective

• Advocate an organized capacity market in the
  form of a formal capacity market versus an energy
  only market

3
NYISO Overview

• NYISO formed December 1, 1999.
• Utility generation divestiture rate makes it one
  of the most divested markets in nation.
• NYISO market volume about 7.5 billion in 2004
  and over 30 billion since inception. Highest
  market volume in East.
• Unique challenge New York City is the worlds
  biggest and most complex load pocket. World
  finance and communications capital.

4
New York ISO"Hub of the Northeast"
Hydro Quebec 35,137 MW
ISO - New England 26,922 MW
IESO 26,160 MW
New York ISO 32,075 MW
PJM 135,000 MW
PJM 135,000 MW
Peak Load in Megawatts
5
NEW YORK ENERGY BY FUEL TYPE 2004
GWh
6
NY Markets

• Day-Ahead Energy Market
• Real-Time Energy Market
• Ancillary Service Markets
• Installed Capacity (ICAP/UCAP) Market

7
Buying Power in New York
Bilateral (forward) Contracts 50
NYISO Day-Ahead Market 45 50
Real Time lt5
Bilateral Contracts outside the NYISO
50 NYISO Day-Ahead Market 45 - 50 NYISO
Real-Time Market lt5
100
8
Day-Ahead Energy Market

• Security Constrained Unit Commitment software
  simultaneously co-optimizes energy and
  ancillaries for the least cost solution
• Hourly Locational Marginal Prices (LMP)
• Binding forward contracts to Suppliers/Loads
• Bilateral transactions accommodated concurrently
  with supply and load bids
• Deviations settled against Real-Time Market
• Installed capacity suppliers are required to bid
  in the Day-Ahead Energy market

9
Real-Time Energy Market

• Real-Time Commitment (RTC)
• Multi-period security constrained unit commitment
  dispatch
• Co-optimizes to simultaneously solve load,
  reserves regulation
• Runs every 15 minutes, optimized over 10 1/4hour
  periods total 2 ½ hours
• RTC15 posts at time 15 and optimized from T30
  through T180
• Issues binding commitments for units to start at
  T30 and T45
• Real-Time Dispatch (RTD)
• Multi-period security constrained dispatch
• Co-optimizes to simultaneously solve load,
  reserves regulation
• Runs approximately every 5 minutes
• Optimizes over a 60 minute period
• RTD15 posts at T15 and optimizes from T15 through
  T75

10
Ancillary Service MarketsHighlights

• Market-Based Services
• Regulation
• 10-Minute Spinning Reserve
• Total 10-Minute Reserve
• 30-Minute Reserve
• Cost-Based Services
• Scheduling, Control and Dispatch
• Voltage Support
• Black Start

11
NYISO Installed Capacity Market

• ICAP Requirements
• are set in advance for the upcoming Capability
  Year by the New York State Reliability Council
  (NYSRC).
• Load Serving Entities (LSEs) meet their
  NYISO-allocated ICAP requirements by
• Self-Supply or Bilateral Transactions with
  Suppliers.
• Purchasing in the Capability Period Auctions
  (6-month strip).
• Purchasing in the Monthly Auctions (for balance
  of Capability Period).
• Paying for the balance of their obligation
  procured on their behalf in the Spot Market
  Auction (1-month) using a Demand Curve.
• All supply is certified/checked out monthly.

12
NY Market Revenue Stream

• The New York Energy market
• allows suppliers to recover their variable costs
  and to compete for profits.
• The New York Ancillary Services market
• allows suppliers to recover lost opportunity
  costs when providing ancillary services.
• The New York Installed Capacity (ICAP) market
• is intended to promote Resource Adequacy and
• allow suppliers to recover a portion of their
  fixed (capital) costs.
• The total revenue from these markets is the total
  revenue stream for suppliers.

13
Need for ICAP Markets
14
Revenue Sources

• Potential sources of revenues for generating
  resources are
• Revenue from the energy market during
  non-shortage hours, net of fuel and operating
  costs
• Revenue generated in periods of shortage when
  prices can spike to levels 20 times higher than
  the average annual energy price.
• Revenue received in the capacity market.
• Ancillary services revenues
• The economic value of these sources of revenue
  governs investment and retirement decisions in
  wholesale electricity markets

15
Substitutes

• Capacity revenues and energy revenues are
  essentially substitutes.
• Under any combination of energy and capacity
  markets, it is ultimately the market participants
  that determine the prices in both markets.
• Markets with higher capacity revenues generally
  sustain higher capacity margins and, hence,
  exhibit less frequent price spikes associated
  with shortages.
• Conversely, markets that generate lower capacity
  revenues will result in lower capacity margins
  and more frequent price spikes associated with
  shortages.
• In the limit, energy-only markets that have no
  capacity revenues rely almost exclusively on
  severe price spikes to establish long-term
  economic signals.

16
History and Political Reality

• The Northeastern U.S. Markets are a product of
• the history of power system operation
• planning practices
• historic grid topology
• limitations on offer prices to limit market power
  abuse
• eliminating seams issues as barriers to trade,
  and
• the need to provide rational long-term price
  signals that would encourage investment in new
  generation and transmission where needed
• The political reality is that energy prices will
  not be allowed to spike to the levels necessary
  to encourage new generator investments.
• Even if market design did not limit offer prices,
  regulatory uncertainty would discourage
  investment in new generating resources

17
Insuring Reliability

• Several proposals have been entertained to move
  to an energy- only market design.
• Simply cannot be made to work with offer caps of
  1000 or less
• Regulators and many Stakeholders will not support
  higher offer caps
• Suppliers will forever face regulatory
  uncertainty
• Traditional utility owners have divested, or are
  divesting, their generation portfolios or
  spinning them off to unregulated generating
  companies.
• There has been significant debate over how to
  maintain an adequate reserve margin.
• Minimum installed capacity requirements were
  imposed on the regulated utilities in the
  Northeast long before divestiture.
• To guarantee the same level of reliability under
  a market scenario, all load serving entities are
  simply required to contract for sufficient
  capacity to meet their installed capacity
  obligations.

18
Installed Capacity Markets in the Northeastern
U.S.

• ICAP Requirements are set for the upcoming
  capability year.
• Load serving entities can meet their ICAP
  requirements by
• Self-Supply
• Bilateral Transactions with Suppliers
• Forward Auctions
• Deficiency/Spot Market Auctions
• After-the-fact penalty procurement

19
Locational ICAP

• Due to transmission constraints into certain
  localities, areas or zones, some LSEs must
  procure at least some of their ICAP requirements
  from resources electrically located within that
  locality.
• New York (NY) has had locational requirements
  since inception. There are two such transmission
  constrained zones
• New York City and
• Long Island
• PJM and ISO-NE have proposals pending before FERC
  to introduce locational ICAP to their control
  areas.

20
Summary/Conclusion

• The design of the Northeastern installed capacity
  markets was born of the pre-existing planning and
  operating practices of the power pools in the
  northeast.
• The market structures and design features
  recognize the need for
• system reliability (insured through installed
  capacity requirements)
• overall market designs coordinating energy,
  capacity and ancillary services
• reining in potential market power
• encouraging robust competition
• mitigating potential barriers to trade
• certainty, market stability, and
• recognizing the political realities of energy
  price caps and regulatory oversight.
• The designs presently employed with installed
  capacity markets uniquely balances all of the
  market needs while appropriately recognizing the
  value of capacity to meet reliability criteria.