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Resource Adequacy and Markets in New England

Explore the challenges and solutions for ensuring a reliable long-term electricity supply in New England through improved pricing structures and market design. Key topics include wholesale and retail market considerations, capacity markets, institutional arrangements, and market alignment.

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Resource Adequacy and Markets in New England

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  1. Resource Adequacy and Markets in New England Massachusetts Restructuring Roundtable March 18, 2005 Mark Karl Manager, Market Design ISO New England

  2. Market Considerations • Investment in resources requires market opportunities for investors to recover long-term costs • Retail customers must see and have a chance to respond to wholesale prices • Development of a viable retail supplier sector • Contributes to long-term supply solutions • Address market power

  3. Resource Adequacy Implications • Wholesale Markets need improved price signals to: • Keep needed plants online • Promote new investment • Encourage customer participation • Retail Markets need improved price signals to: • Encourage efficient electricity use and reduced electricity bills • Reduce price volatility risk

  4. Resource Adequacy Through Wholesale Markets • Competitive Wholesale Markets • Energy Spot Market • Provides short-term price signal for efficient dispatch • Reflects high prices during shortages • Capacity Market • LICAP adds to energy prices during shortages to improve long-term investment signal

  5. Resource Adequacy Through Retail Markets • Competitive Retail Markets • Facilitate long-term contracts through institutional arrangements • Structure of standard offer contracting • Retail aggregators • Adjust retail rate structures • Reflect the real time cost of electricity

  6. Resource Adequacy Challenges for Markets • Challenges to Providing Reliable Long-Term Supply of Electricity • Properly pricing electricity • Difficult to properly price electricity to send long-term signals needed to support investment • Especially in times of shortage • Market Alignment: • Wholesale and Retail sectors must jointly provide prices and frameworks that support long-term investment

  7. Resource Adequacy Challenges: Wholesale Pricing • Energy Market Pricing • Market reserve requirement means energy shortages almost never occur • Properly pricing energy during reserve shortages is very difficult • $1,000 price cap does not allow energy prices to reflect value of lost load • Estimated to be between $10,000 –$30,000 • Capacity Market Design • LICAP proposal address energy market problems • Pays capacity based on on peak performance

  8. Resource Adequacy Challenges: Retail Pricing • Standard Offer Structures • Generally, very short term • Inhibits long-term contracting that encourages investment • Possible options • Allow retail suppliers to create market solutions • Change approach to Default/Basic Service procurement and pricing • Some large customers on competitive supply • Provides opportunities for retail suppliers to enter longer term contracts

  9. Resource Adequacy Challenges: Alignment • Institutional Arrangements can block long-term resource adequacy • Utility obligation to serve has been eliminated, but retail customers have not assumed risk of contracting their supplies • No clear assignment of responsibility for adequacy long term • No incentive to assume responsibility • No incentive to take long term position in the market

  10. MarketSolutions • Improve Elements of Wholesale Markets • Capacity Market (Maine Procurement Proposal, CRAM Initiatives, LICAP) • Direct participation by demand in capacity, reserve, and energy markets • Retail Provider of Last Resort (POLR) procurement options: • Reconsideration of POLR/ Default procurement practices • Eliminate • Modify procurement processes and terms • Real-Time Pricing (RTP) for large customers • Different prices based on peak periods (dynamic retail pricing) options for smaller customers

  11. Resource Adequacy and Capacity Markets in the Northeast • New York • Demand curve and three locational capacity zones • State, through New York Power Authority and Long Island Power Authority, has intervened • PJM • Transitioning from full deliverability to locational capacity market structure • Design Incorporates elements from New England Design and CRAM effort

  12. Other Resource Adequacy Approaches • California • February PUC order: • “Compared to reliability-must-run (RMR) contracts, a capacity market, especially with locational attributes, could provide the CAISO with a more cost-effective means to access the resources it needs, without interfering with LSE procurement.” • “…parties are placed on notice that the Commission staff is undertaking an evaluation of capacity markets and how development of such a market in California might effectively promote achievement of the Commission’s goals for resource adequacy.” • PUC will analyze New York and New England approach

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