Thursday’s FERC technical conference on capacity markets elicited sharply differing views on a variety of design concepts and technical issues. Some of the disagreements have been around since the beginning of capacity markets, others are reflecting the influence of new technologies.

Below is a summary of some of the key issues.

Forward Period & Commitment Period

Having divested virtually all of its generation, and not wanting to sign long-term purchase power agreements, Consolidated Edison Co. relies on the capacity market, said Richard Miller, director of energy markets policy. The company’s service territory straddles the New York border with New Jersey and Pennsylvania, giving it experience with both NYISO and PJM.

Miller noted that PJM, which purchases capacity three years in advance, has attracted more than 4,000 MW of new generation in each of the last two auctions (more than 3.5% of the forecast peak), while the NYISO, which has a 6-month forward, has added less than 675 MW (1.7%).

Although PJM primarily acquires capacity for a one-year commitment period, some new resources can lock-in prices for three years.

But Analyst Julien Dumoulin-Smith, of UBS Investment Research said even three years is a “mismatch” with the long life of new generation, noting that California is “trending to a 10-year market.”

Todd Snitchler, chairman of the Public Utilities Commission of Ohio, said bankers told his agency “Five to seven years [commitment] … would make it much more economical to get new generation.”

Robert Erwin, general counsel of the Maryland Public Service Commission, said the short commitment period exacerbates’ bankers concern over the volatility of capacity prices. Bankers have told the PSC: “There’s no way I’m going to lend money on that kind of price signal – and certainly not for one year [of guaranteed revenue].”

Demand Response vs. ‘Steel in the Ground’

The role of demand response was another issue that sparked much discussion.

“It is simply not the case that 1 MW of Demand Response provides the same reliability contribution to the grid as 1 MW of steel in the ground,” said Shahid Malik, president of PSEG Energy Resources and Trade.

James Holodak, vice president of regulatory strategy and integrated analytics for National Grid USA, agreed, bemoaning demand response, which is not subject to must-offer rules, “jumping in and out of the market.”

Andy Ott, PJM executive vice president for markets, said PJM is seeking to treat demand response more as an operational resource reflecting differences in physical characteristics, as is the case with generators. He noted that most of the 14,000 MW of demand response that cleared in the most recent base auction gets two-hour notice and an identical price. “We can’t sustain that,” he said. “We really need to have more diversity.”

“Iron in the ground is worthless,” said Peter Cramton, professor of economics at the University of Maryland. “What consumers should be buying is energy in shortage situations.” He called for an ex-post grading of resources — a “second settlement” — with good performers receiving bonuses and penalties for poor performers.

Dan Curran, market strategist with demand response aggregator EnerNOC, said the “downstream” focus on demand response “is treating the symptom and not the cause.” He said it was more appropriate to set qualifications for participation in DR, as PJM is considering.

Tranches

The commission asked the panelists for their opinion on creating “tranches” of capacity products based on operational characteristics such as fast-ramping or load-following ability given the increase in variable and intermittent resources.

Michael Hogan, of the Regulatory Assistance Project, is a supporter, saying tranches would create a fairer and more efficient market.  “We’ve had ObamaCare in energy for years…,” he said. “People are paying for insurance they don’t need for a service they don’t really consume.”

But Cramton called the idea “a nightmare” that would lead to “rent-seeking.”

Sue Kelly, general counsel of the American Public Power Association, also said she feared that tranches would lead to gaming. “There’s always an extremely enterprising financial player who will find a way to arbitrage,” she said.

Consultant James Wilson urged a “purist” view: “Stay focused on the peak day… rather than [making] it more complicated through ramping … or tranches.”