Forum Topics

Central Procurement Structures for Energy, Capacity, and Environmental Products

A transition to a clean portfolio of resources that maintains or exceeds today’s standards of affordability and reliability will require significant investment. To keep costs down, long-term commitments to generation to reduce financing costs will be important.

Centralized procurement methods provide a means of coordinating an efficient set of resources and providing longer-term certainty to supply and demand resources.

Aligning market signals with long-term and short-term operations and regional decarbonization goals is a complicated problem. Proposals for decentralized markets in Topic 3 approach the problem with a different solutions set.

 

Proposals for Centralized Procurement Structures for Decarbonization

The reference presentations for this topic cover two possible market designs, with the reference papers covering a total of five proposals.

Expert Commentary

These comments are personal opinions and do not represent the official position of an expert’s employer or clients or the Future Power Markets Forum.

Andrew Ott, Formerly PJM Interconnection

The proposed FCEM voluntary auction to exchange clean energy attribute credits seems like a well developed and workable proposal to help achieve the coordination necessary at a regional level to lower overall costs of achieving the transition. It seems to offer an opportunity to address one of the most significant problems .. lack of coordination between local state and regional objectives.  One of the benefits of such coordination could be significant cost savings in the energy transition.  

In addition to coordination of clean energy attributes, the approach described in Kathleen’s presentation could be adapted to coordinate flexibility attributes of distributed resources.  One significant challenge I have observed for companies seeking to invest in storage and alternative technologies is the lack of a forward contract, forward market or price signal. This makes it hard for technology companies to get financing for their innovations.  So it seems to me a coordinated voluntary exchange for flexibility attributes would be worth exploring. 

Rana Mukerji, New York Independent System Operator

In my opinion the centralized approach with the ISO/RTO procuring “needed” resources based on goals set by planners and regulators by structuring long term contracts has a veneer of a market but in reality destroys one of the fundamental tenets of Market Design which involves putting the risk of investment decisions on the supplier and not on the load. By the ISO/RTO engaging in writing long term contracts to meet State Public Policy Goals, the ISO/RTO would burden consumers with the risk of significant levels of stranded investments. Avoiding rate payer stranded investments was perhaps the key driver for the creation of wholesale markets and the centralized approach undermines this basic premise. That said we should acknowledge that several industry experts have proposed planning based long term procurement models administered by an ISO/RTO. However in my opinion such approaches are misguided and ultimately detrimental to the functioning of wholesale markets.

Jay Morrison, National Rural Electric Cooperative Association

Electric cooperatives were formed by their member-owners to bring them and their communities the benefits of safe, reliable, and affordable electric power. Cooperatives are also increasingly being asked to include environmental considerations in their power supply decisions. Cooperatives meet all of those expectations by investing in a diverse portfolio of resources that manages a wide range of operational, regulatory, and financial risks. The best regulatory and market structures are those that enable and facilitate those efforts. That is why electric cooperatives have long been strong proponents of wholesale competition, open access transmission, and regulations that prevent discrimination and the exercise of market power. Wholesale competition increases the options available to load serving entities seeking to manage risks and expectations, reduces wholesale power costs, and improves reliability.

It is for this same reason that cooperatives have opposed policies and market designs that limit their ability to build and manage their own resource portfolios. Orders penalizing self-supply in centralized markets and reducing local control over the integration of behind-the-meter resources are good examples of those kinds of policies. They take control away from state and local regulators and wholesale customers and put that control in the hands of market operators.

Were electric power an undifferentiable commodity and if every consumer and community had the same economic, environmental, and other policy preferences, it might be reasonable to support centralized acquisition of generation resources and centralized decision making about the proper relationships between retail consumers and their utilities. But it is not and they do not. For that reason, we can paraphrase Thoreau and say that wholesale market operator that governs resource investment decisions least governs best.

Jacob Mays, Cornell University

Recent years have seen rapid innovation on both the supply and demand side of electricity markets. A key challenge for centralized structures is to keep pace with this innovation while maintaining a durable design. Current capacity markets likely undervalue flexibility and preferentially facilitate financing of resources with higher marginal cost, making them ill-suited to future low-carbon systems. Given our collective track record, I am skeptical that we can construct centralized markets that will perform better than an ERCOT-style market relying on full-strength energy prices and decentralized decision making.

With that said, I do think it is worth highlighting one virtue of the Corneli proposal, namely, its coupling of generation investments with transmission expansion. Transmission planning is inherently a task that requires some centralized coordination to achieve good results. Given the degree to which low-carbon resource portfolios benefit from an enhanced transmission system, it seems clear that better coordination is needed.

Travis Kavulla, NRG

Clean Electricity Standards (CES) are frequently advertised as a “market-based solution” because their compliance instruments are tradable credits. The unfortunate reality is that the markets for these credits, such as they are, are a mess. They are plagued by the lack of a uniform product definition and scale, as well as the sudden excursions caused by changes in everything from federal trade policy to the state CES. The absence of a more functional market inevitably will cause ambitious policymakers to default to what they know: commandeering the balance sheets of price-regulated firms to act as a counterparty to long-term deals, thereby shifting the risks inherent in these deals to a captive set of customers. This will end badly, the history of the power sector tells us. How to solve it? By getting CES into a market that works, and ensuring that the market has what it takes to promote confidence and drive investment. Possibly only national action toward creating an effective CES auction could do that. Yet one can hope that states, acting jointly as they have done before to create REC registries and carbon-allowance auctions, could work toward forming a common market to achieve their mutual clean-energy ambitions.

Michael Hogan, The Regulatory Assistance Project

The reference presentations show two pretty different visions of centralized procurement, one of which was highly prescriptive (Corneli), the other far less so (Spees). The advantage of the highly prescriptive approach would be that a lot of stuff would get built. The advantage of the far less prescriptive approach is that it leaves much more room for surprises and would provide additional support for new investment. If done right it will provide a new platform through which low-carbon investment can be achieved.

However, the very reason cited for the need for the highly centralized approach – that it would be very expensive to get the integrated system development wrong – is why it’s problematic. We simply do not know what options will be available 10 years from now, or where the development of the current options will go, which is well within the window of “lock-in” prescribed by this approach. It also requires assumptions today about how much of the problem can and will be addressed by demand-side innovation, assumptions that are virtually certain to be in error both as to the extent and the shape of such options. It is, in other words, nearly certain to lock in the “wrong” solutions, it’s just not possible to say in what way they’ll be wrong. The disadvantages to the far less prescriptive approach are in the work that would be required relative to the difficulty in seeing how it departs in any substantial way from existing options without becoming far more prescriptive. It would require multi-state, regional standardization of the relevant products and it would (contrary to Dr. Spees’s claims in the reference presentation) encounter the same obstacles relative to the MOPR order that existing RPS-style programs are encountering. If we can solve the MOPR problem and/or get rid of the capacity markets, extend the RPS model as necessary, and adopt more wide-ranging carbon pricing policies, the administratively allocated 7-12 year contracts guaranteed by consumers are superfluous – retailers and wholesale buyers will do what’s necessary to meet their obligations. The idea works fine as a voluntary platform, but beyond that, it leads to the same lock-in risks as other centrally administered long-term contracting mechanisms.

Devin Hartman, R Street Institute

Centralized market structures are capable of yielding second-best outcomes if the role of the “visible hand” is limited to efficiently correcting for market failures, while ensuring investors bear investment risk. The centralized model will face more challenges in productizing the capabilities “needed” for resource procurement. It’s critical for centralized designs to enable differentiated reliability products to flourish as the resource mix evolves.

Mark Dyson, Rocky Mountain Institute

Proposals for centralized procurement models have merit in that they allow for a technology-agnostic market-clearing function for resources that contribute to system decarbonization. There appear to be major issues around jurisdiction within existing constructs, and in light of legal precedents. In addition, it is unclear how well any centralized procurement model could effectively solve for the inevitably diverse priorities of customers and governments (e.g., local economic development), in addition to the commodity services provided by different clean energy projects.

Elise Caplan, American Public Power Association

APPA does not support the current mandatory capacity constructs in the PJM Interconnection, ISO-New England and parts of the New York ISO, and has long advocated for market rules that fully allow for state regulatory commission and local utility resource procurement to meet public policy goals. Any capacity construct must preserve the ability of public power systems to obtain through self-supply sufficient power supply and demand-side resources to serve their retail loads at least cost, taking into account short-term and long-term portfolio needs, resource diversification, environmental considerations, and any other policy preferences of their communities.

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