New filings at the Federal Energy Regulatory Commission raise new questions about the effectiveness of capacity markets.

Filings at the Federal Energy Regulatory Commission raise questions about the effectiveness of capacity markets.

Wonder why capacity markets don’t work? Look no further than New England, where officials warn that electric reliability is deteriorating.

In a recent filing to the Federal Energy Regulatory Commission, operators of the New England power grid noted that the rate of unplanned electricity outages was increasing and reliability falling — despite the existence of a capacity market.

For those new to the issue, a capacity market delivers mandated subsidies to electric generators — that is, extra money beyond those which they would receive for selling power — theoretically for the purpose of improving grid reliability. Ultimately consumers pay for these subsidies, which are distributed to generators through an auction arrangement.

A capacity market does not exist in Texas, although generation company lobbyists have been pressing hard for one. According to some estimates, capacity subsidies under such a system could exceed $4 billion annually in Texas.

The Texas Coalition for Affordable Power, other consumer groups, as well as  business, free market and environmental organizations all have warned that the expensive subsidies don’t work well and needlessly reward generators, but with few guarantees for consumers. Judging from these new statements to federal regulators, it appears the northeastern grid operator would tend to agree with these concerns.

In documents filed Jan. 17, officials with the New England Independent System Operator said the existing subsidy system in that region is deeply flawed and that “reliability in New England is deteriorating.” The New England ISO (that region’s version of ERCOT) blamed a system that is overly complex, and that rewards generating units with low operating-costs — regardless of the reliability of those units.

TCAP recently released a new report on the capacity market debate.

TCAP recently released a report on the capacity market debate.

“In the current (capacity market) design, capacity payments are poorly linked to resource performance,” wrote the northeastern grid officials. “In many cases, capacity resources are being paid for simply existing, rather than for actually performing when they are needed. With the linkage between payments and performance broken, there is little incentive for resource owners to make investments to ensure that their resources will be ready and able to provide energy and reserves when needed. The lack of such investment is posing serious threats to the reliable operation of the system.”

The grid operator further noted that the forced outage rate in New England has been increasing since the adoption of a capacity market, and now is nearly double the rate that existed when the first capacity auction was conducted four years ago.

For more about the capacity market debate, check out TCAP’s new report, A Retreat from Electric Competition. You can find it here.

— R.A. Dyer

What is the Texas Coalition for Affordable Power?

TCAP is a coalition of more than 160 cities and other political subdivisions that purchase electricity in the deregulated market for their own governmental use. Because high energy costs can impact municipal budgets and the ability to fund essential services, TCAP, as part of its mission, actively promotes affordable energy policies. High energy prices also place a burden on local businesses and home consumers.
 

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