Adopting the Market Monitor’s proposed changes to capacity market rules could almost triple auction revenues, the Monitor said in a report last week.
The Monitor said the $5.5 billion generated during the 2016/17 Base Residual Auction last year would have been $6.9 billion if the Short-Term Resource Procurement Target had been eliminated. The target cuts the amount of capacity acquired in the base auction by 2.5%, setting it aside for purchase in incremental auctions for the delivery year.
The 2.5% reduction removed 4,153 MW from the RTO demand curve, the Monitor said in an analysis of last year’s BRA. The target, which reduced clearing prices and quantities for all regions in the auction, should be eliminated, the Monitor said.
“The 2.5% demand reduction is a barrier to entry in the capacity market for both new generation capacity and new DR capacity,” the Monitor said. “The logic of reducing demand in a market design that looks three years forward, to permit other resources to clear in incremental auctions, is not supportable and has no basis in economics.”
‘Inferior’ Demand Response
The Monitor said revenues would have been $10.1 billion if only generation and Annual DR were offered, and Limited and Extended DR were eliminated.
The Monitor said Limited and the Extended Summer DR should be eliminated, and the restrictions on the availability of Annual DR ended, so that DR has the same obligation as generation to provide capacity year round.
“The Annual DR product definition is the only one consistent with being a capacity resource,” the Monitor said.
Eliminating both the 2.5% holdback and “inferior” DR would have produced $15.8 billion in revenues, the Monitor said, almost three times what capacity resources actually received.
Import Impact
The report also looked at the impact of generation imports on clearing prices.
It found that excluding external generation without firm transmission would have boosted revenues to $6.8 billion, an increase of almost $1.3 billion.
Reducing external generation offers by 25% would have increased revenues by $637.5 million, the report said.
The Federal Energy Regulatory Commission last week approved a rule change that will reduce capacity imports by as much as 17% from what cleared in the 2013 auction. (See related story, FERC Clears Capacity Import Limits.)
