Single Buyer Model for Capacity by chenmeixiu


									Single Buyer Model for Capacity

           Tom Welch
          March 26, 2004
       Reflections on the Debate
• Character of electricity frustrates purists on both sides
   – Binary nature of reliability creates cliffs in market
   – Time differentiation of product creates capital cost
     differentiation relative to energy cost
• Market orthodoxy sees capacity auctions as IRP
• Regulatory orthodoxy sees market results as insufficiently
• May be time to recognize inevitability of hybrid
   – Retreat from full risk shift to market may be required
            Decision Criteria
• Can offer only political perspective
• (Currently) favored criteria:
  – Connect (explicitly) payment with product
  – Allow politics to determine cost/benefit balance
    of persistent reserve margins
  – Technology agnostic
  – Allow markets to determine most efficient
    solution within defined needs
    Objections to Demand Curve
• It doesn't connect payment with delivery
   – People who build won't get the money
   – People who get the money won't build
• Choices of slope are arbitrary
   – Market can't set slope because of flatlands and cliffs
   – History reflecting fully integrated period say little about
      needs in market context
   – By choosing slope, regulators re-introduce
      administrative determination of "need" (so why not do
      it directly?)
   Objections to Demand Curve
       LICAP: Near Term
• Doesn't connect payment to problem
  – Pays those who need support to run too little
  – Pays those who don't need support too much
• Locational element identifies who should
  pay, but proposed LICAP approach does not
  provide politically palatable (or
  economically effective) answer to near term
                An Alternative
• Short term:
   – Find the money within the capacity constrained areas to
     keep necessary units running
   – If politically necessary, provide minimal support level
     to existing units (minimally differentiated between
     short and long areas) pending implementation of long
     term solution
• Long term
   – Develop model that satisfies decision criteria
    The Single Buyer Auction
• Long term approach
  – Links payments with delivery
  – Allows RSC determination of need (beyond
    NERC requirements)
  – Allows demand, DG, and all technology
    combinations to participate equally
  – Provides "market" for identifying most efficient
    Need Assessment: Process
• RTEP/PSPC (or equivalent) estimates
  baseline (meet NERC reliability guidelines)
• RSC provides overlay (diversity,
  environmental considerations, additional
  surplus to limit market power)
• RTO files, FERC approves
 Need Assessment: Granularity
• Estimate out far enough to permit greenfield
  projects to bid (3-5 years?)
• Need assessed by zone where import or
  export constraints are identified
• (Optional) Need established by type of
  product required (e.g. baseline, peaking)
• Held annually for period beginning T + "x"
  years (e.g. 2005 auction for obligation
  beginning 2009)
• Existing and new can participate
• All currently in the market must bid (similar
  to current rules against withholding in
  energy market)
• RTO or another entity with tariff authority
  is counterparty
           Product Description
• Obligation (for specified period of years)
  – To increase distance between load and available
    generation at specific time and place
  – Bid at or below strike price established in
  – Example
      • Increase distance between load and available
        generation by 50 MW
      • Deliverable to NEMA
      • Bid into market at $100/MWH
  Product is technology agnostic
• Treat equally
   – Local generation
   – Local demand reduction
   – Remote supply or demand resource plus ability
     to deliver
• Note -- As demand bids become more
  sophisticated and pervasive, need for physical
  peaking units is likely to decline
           Capacity Payment
• Pay as bid (?)
• Payment made at time of delivery
  – Payment is contractual obligation of RTO or
    other entity filing capacity tariff with the
    FERC-given right to collect from load
• Payment collected from load at time of
  delivery based on proportional peak demand
            Energy Payments
• Owner of energy associated with the
  capacity payments:
  – Has sold a call option
  – Must bid in at or below strike price
  – If dispatched receives lesser of
     • Market price of energy
     • Strike price in contract
 Treatment of bilateral contracts
• Load with bilateral contract for capacity has
  the right to bid the capacity into the auction.
  If the bid is made at the price paid for
  capacity, revenue neutrality is assured
        Security for delivery
• Greenfield projects can bid but all must
  provide security
• Milestone obligations could be imposed for
  new construction

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