Capacity markets set back in Ontario, Alberta and PJM
Over the course of ten days, capacity markets in three jurisdictions were dealt major blows. On July 16, Peter Gregg, the CEO of Ontario's IESO, advised stakeholders that the IESO was “stopping further work on the current High Level Design (HLD) for the ICA (Incremental Capacity Auction).” He noted that the IESO would continue with its efforts to implement the Transitional Capacity Auction with a first auction this December.
On July 24, the government of Alberta announced that it was cancelling plans to establish a capacity market in that province. It said, “Government will table the necessary legislation and amend regulations to stop the implementation of the capacity market as soon as possible.”
On July 25, the U.S. Federal Energy Regulatory Commission (FERC) issued a ruling indefinitely postponing the capacity market planned by PJM Interconnection, the utility that serves Pennsylvania, New Jersey and Maryland. “I think that PJM would be well-served by engaging with the states that regulate its member companies to ascertain their long-term commitment to the mandatory capacity market for resource adequacy,” Commissioner Cheryl LaFleur wrote.
Travis Lusney, Manager of Procurement and Power Systems at Power Advisory LLC, pointed to several reasons why Capacity Markets have failed to materialize. “CMs attempt to reach a deterministic conclusion for what is essentially a probabilistic problem (i.e., resource adequacy assessments) and overly rely on centralized planning assumptions. Second, CMs reduce price scarcity signals that encourage buyers to act in their best interest. Third, CMs do not support climate change policies and renewable generation investment.” Mr. Lusney also noted that DERs are "providing customers with new options and flexibility to manage their energy needs," whereas “CMs do not support customer’s evolving preferences.”
Rob Sinclair, a Strategic Advisor with EnerStrat Canada, notes that there’s a persistent developmental problem: “Many governments and capacity responsible entities are seeking to subsidize or contract resources to ensure the supply mix they believe to be in the best interests of their citizens/customers, making it difficult to establish or run CMs.” As others have noted, capacity markets are unlike other forms of markets. Mr. Sinclair explains, “While CMs have the appearance of traditional markets, their demand curves are administrative constructs based on planning assumptions, and not the aggregated demand of a large number of buyers each with limited market power as markets are commonly thought to be composed of.”