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Thinking Outside the Capacity Markets Box APPA Proposals for Reform of the Reliability Pricing Model Elise Caplan Manager, Electric Market Analysis OPSI Meeting, October 13, 2015 APPA’s Concerns About RPM • Restrictions on self-supply and threats to the public power business model. • Higher and more volatile prices, frequent rule changes, including problematic capacity performance rules. • Difficult stakeholder processes. • Uncompetitive market structure. • Financial benefits accrue to owners of existing capacity if the market is more constrained. 1 Capacity Markets Are Not the Optimal Means to Determine a Resource Portfolio • RPM does not entail long-term planning for generation diversity or public policy goals, and every MW is paid the same, regardless of technology, fuel access, age, emissions, etc. • 98% of the new MW in 2013 and 96% in 2014 required a long-term contract, ownership, or financial hedge. 2 Unanswered Questions About RPM • Is resource adequacy being met at least cost? • Are the resources being retained those that are the most needed? • Do new merchant builds account for fuel diversity, pipeline capacity, and future natural gas prices? • How will energy and ancillary service market changes impact the capacity markets? What is the total cost? • Can the $7 billion cost of the capacity performance rule be justified? • How will states implement the Clean Power Plan without control over capacity resource decisions? 3 APPA Proposed Reforms to RPM • Transition from mandatory market to voluntary, residual capacity procurement mechanisms. • LSEs able to self-supply through ownership and bilateral contracts without constraints. • Retail access states would need to determine an entity to sign long-term contracts for EDCs. • Public power and co-ops could opt in to state or regional resource procurement. 4 Additional Features of Proposed Reforms • Resource adequacy standards with penalties for non-compliance. • FERC/state working group evaluates seller-side market power and determines if appropriate restrictions are needed for pivotal sellers. • RTOs and states determine the most economic and efficient options to relieve transmission constraints. 5 Concluding Thoughts • Capacity “markets” should not be the primary means to support needed capacity. • A meaningful dialogue is needed to shift the paradigm away from capacity constructs. • APPA’s proposal can form the framework for such a dialogue. • Questions and comments are encouraged! 6