NEW ORLEANS — The likelihood of a sloped demand curve in MISO’s capacity market earned seals of approval from panelists at Gulf Coast Power Association’s 9th Annual MISO/SPP Regional Conference March 8-9.

MISO Independent Market Monitor David Patton said he recommended the grid operator adopt a sloped demand curve for about 20 years, to remedy its “broken” capacity construct.

Patton said he assumes that stakeholders opposed to a sloped curve are acting in their self-interest. He said members sooner or later must accept that they may have to purchase capacity “that keeps the lights on” in a market structured to reflect capacity’s marginal reliability.

MISO is intent on designing and implementing a downward-sloping demand curve by its 2024/25 capacity auctions. It will replace a demand curve that abruptly cuts off excess capacity’s value when reserve margin requirements are satisfied. (See MISO Charts Course on Capacity Auction’s Sloped Demand Curve.)

The grid operator is proposing four sloped demand curves for each of its seasonal auctions based on separate seasonal reliability targets. Its analyses have shown an incremental value for capacity procured beyond the summer reliability target.

MISO Senior VP Todd Ramey | © RTO Insider LLC

“Historically, as an industry, resource adequacy was binary. Either you had it or you didn’t,” said Todd Ramey, MISO’s senior vice president of markets and digital strategy.

Ramey said that the paradigm led to the RTO’s longstanding vertical design.

However, he said a 1.2-GW shortfall in last year’s capacity auction chipped away at MISO’s one-day-in-10-year reliability standard to a “one-in-eight, one-in-five year.” (See MISO’s 2022/23 Capacity Auction Lays Bare Shortfalls in Midwest.)

“When we started, we had a pretty healthy reserve margin for the footprint,” Ramey said. “Here we are 10 years later, and we’ve been wildly successful at bumping down our reserve margin.”

He said the static demand curve has produced capacity pricing that is “inefficiently low” to spur new generation development.

Patton said that had MISO used a sloped curve in previous auctions, it would have produced prices in the $100-$150/MW-day range.

“It’s going to hit everybody,” Patton said of reliability issues, especially during winter storms.

“We can’t maintain reliability without a capacity market that functions,” he said. “We need to realize that keeping the lights on is way more important than spending a little more on capacity.”  

Patton also said stakeholders must get comfortable with MISO placing a marginal value by resource type on capacity.

“You get to a point that you have enough wind that building more wind isn’t going to have reliability value,” he said.

Brett Kruse, Calpine’s vice president of market design said he was surprised that MISO is willing to bend its demand curve after years of opposition. He said he considered it inevitable.

Kruse said a demand curve sending “investment signals” is meant to keep existing baseload generation online. He said new merchant thermal generation is unlikely to be built without developers first securing 20- to 30-year power contracts.

Peregrine Consultants President Charles Griffey said MISO doesn’t need a three-year forward market if it can develop incentives within its one-year spot market.

“The problem is do we really have that incentive in these areas?” he asked rhetorically.

Griffey said demand curved shapes will likely be a “political decision” involving a subjective reliability target, while factoring in carbon-reduction goals.  

Patton agreed that forward capacity markets are a “terrible, terrible” idea, saying they interfere with investment, fuel procurement and generator-retirement decisions.

Lisa Duffey, Cleco’s director of strategic market and fuel operation, said she wasn’t sure MISO and SPP were doing enough to make sure that capacity is deliverable to load. She said MISO’s planning doesn’t ever seem to help localized transmission constraints.

“Are we fixing the real problem?” she asked.

Patton said MISO should design its local resource zones to reflect actual load pockets. He said Zone 9, which combines East Texas and Louisiana, is the worst offender for not recognizing natural electrical boundaries.