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A method to properly value solar and wind resources in wholesale capacity markets across North America

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Today’s wholesale capacity markets treat all capacity equally with one overall objective, to acquire enough electric generating capacity to meet reliability requirements at the lowest consumer cost. ISO New England’s CEO, Gordon van Welie clearly stated the problem with today’s market systems in a recent Commonwealth Magazine article, “The existing market has one objective, which is to provide reliable electricity at the least possible cost, that’s all this market does. It doesn't incorporate an environmental objective”. Several states, ie. New York, Massachusetts, and others, have initiated environmental programs to reduce green house gases and achieve renewable energy targets.  However, current capacity markets are not designed to properly value capacity based on other characteristics such as environmental impacts on CO2, SOx, NOx, fly ash, etc.

A new approach to capacity acquisition is needed that properly values and prioritizes capacity that satisfies each individual State’s energy targets, as the first priority. A proposal for an “Always on Capacity Exchange” (AOCE pronounced ACE) has been submitted to industry as a means to properly value capacity resources based on their ability to meet each state’s environmental and renewable energy targets and other characteristics important to system operators, such as rapid up and down ramping capability, using a market based approach. The proposal calls for the creation of an industry standard, capacity exchange trading platform that enables capacity sellers and buyers to transact using a bid/ask approach, across control areas, within a nationwide capacity exchange market.

Owners of Solar and Wind resources would offer their capacity into the exchange at an asking price based on supply/demand, on hours when they are capable of producing energy. Just as in today’s capacity markets, ISO’s would be required to acquire the proper amount of capacity, however instead of acquiring capacity simply based on lowest cost, a precedence order would be applied. ISO’s would be required to purchase capacity using the following priorities: 1. Satisfy individual State energy targets, for example a State target of 20% renewables would require an ISO to satisfy 20% of each day’s forecasted energy consumption in that State with renewable resource capacity; 2. Satisfy reliability goals by acquiring enough capacity to meet control area forecasted peak demand and reserves on an hourly basis, this will eliminate over buying excess capacity, which occurs today; 3. Based on economic goals, i.e. lowest consumer cost. Capacity could be acquired from one location and delivered to another location, crossing control area boundaries, provided appropriate provisions are made, i.e. e-tags secured for the entire route. This would enable excess capacity in New England to be available in PJM’s control area, provided enough transmission capacity is available and can be secured.

The proposed ACE should be designed and developed within a forum that supports an industry consensus approach engaging all stakeholders (i.e. capacity suppliers/buyers), regulators, policy makers and consumers, with nationwide scope and formal standing as an ANSI standards development organization, with a successful track record for developing wholesale electric industry standards across North America.

Richard Brooks's picture

Thank Richard for the Post!

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Matt Chester's picture
Matt Chester on January 24, 2019

Another great writeup, thanks for your insights Richard.

“The existing market has one objective, which is to provide reliable electricity at the least possible cost, that’s all this market does. It doesn't incorporate an environmental objective”.

I can't help but think, when reading this quote, how much having the environmental & public health externalities priced into electricity costs would go a long way towards these goals, as well. Such carbon pricing mechanisms still seem a ways off politically, but at least they're being talked about too. But given that uncertainty, ideas like the AOCE are important today as well.

Richard Brooks's picture
Richard Brooks on January 24, 2019

Thanks Matt for your always insightful commentary.

Bob Meinetz's picture
Bob Meinetz on January 24, 2019

 

"A proposal for an “Always on Capacity Exchange” (AOCE pronounced ACE) has been submitted to industry as a means to properly value capacity resources based on their ability to meet each state’s environmental and renewable energy targets and other characteristics important to system operators, such as rapid up and down ramping capability, using a market based approach."

Richard, how could variable solar and wind sources possibly provide "rapid up and down ramping capability"? Relying on them to balance supply would make grid stability completely dependent on weather/time of day.

Currently, "natural gas" (or methane, a fossil fuel contributing to global warming) is required to serve that purpose. I don't see how capacity markets for methane will do anything to improve that situation.

Richard Brooks's picture
Richard Brooks on January 24, 2019

Bob, thanks for your comment.

Rapid up/down characteristics would likely be associated with capacity offers from other types of capacity resources, such as fast start units. The proposed exchange is intended to allow resouces with varying characteristics to place offers into the exchange, which the ISO acquiring the capacity may wish to prioritize in their procurement process. I can envision an offer from a fast start unit in Boston for the entire month of July covering hours 1800 - 2100 for 20 MW at $$$ being an attractive acquistion for an ISO and the resource owner would price this accordingly this service. Likewise, I can see a solar farm in Western Mass making a capacity offer for the entire month of July covering hours 0600-1700 for 40 MW at $$$ being attractive to an ISO in order to meet State energy targets. All would be existing, installed resources in order to participate in the Exchange.

Bob Meinetz's picture
Bob Meinetz on January 25, 2019

How would owners of the solar farm in Western Mass know, in advance, that weather for every day in July will not be cloudy?

Though that method of valuing solar and wind resources might be advantageous for a solar farm owner selling 40MW of non-existent, 6:00-AM solar capacity (even on clear days), I'd hardly consider it a proper one. Sounds more like a swindle, to me.

Richard Brooks's picture
Richard Brooks on January 25, 2019

Bob, that was just an example. A proficient market trader would set the parameters properly. In addition, this approach is far more cost efficient than today's approach where every hour is treated like it "could be" the peak demand hour. I don't think we've ever seen 3:00 AM on any day in history set the yearly peak demand value, but that's how much capacity is being purchased for 3:00 AM.  I encourage insightful, professional participation in this discussion by all.

Bob Meinetz's picture
Bob Meinetz on January 25, 2019

Just trying to understand how "capacity" payments work -

So, a solar farm is not selling electricity per se, but potential capacity for a specific period - a bet - and isn't liable if his farm doesn't produce any energy on a given day, or a given week? Given solar's capacity factor in Massachusetts (~13%) and the risk that such an investment would entail, seems capacity would have to be priced for next-to-nothing.

Then there's the other possibility - the purchaser would be required to pay the solar farm for mid-afternoon generation, even if demand was non-existent?

 

Richard Brooks's picture
Richard Brooks on January 25, 2019

There are two distinct makets "capacity" and "energy". Capacity is acquired by an ISO in order to ensure that there will be generators available to meet future demand. Energy markets are all about near-term pricing of energy for a given hour/location (i.e, Locational Marginal Pricing - LMP) .  Capacity is an "insurance policy" that generators will be available, whereas energy markets set the price of actual electrons per MWh.

In the AOCE concept, the value of solar farm capacity is based on supply/demand. If a State requries 20% of energy demand be satisifed with renewable energy, then this solar capacity can be quite valuable. The energy produced by the solar farm is paid to the solar farm owner based on the marginal price of energy at the location of the farm, for the amount of MWh's of energy produced by the farm for a given time period (one hour).

In summary, the solar farm owner receives two payments, one for capacity (a guarantee to be available for a given time period) and the second payment for whatever energy it produces each hour (which could be 0). There are penalties for non-performance by a capacity resource, if they are called on by the ISO to produce energy and they fail to deliver.

Grid operators are responsible for balancing supply and demand so they can always curtail a generator if there is too much generation or, in the inverse, too little demand.

Bob Meinetz's picture
Bob Meinetz on January 25, 2019

Thanks, that's how I thought it was supposed to work - you've confirmed renewables capacity markets make absolutely no economic sense at all.

• A solar farm owner is incapable of "guaranteeing" generation will be available for a given time period tomorrow, next week, or next year. It depends upon when the sun is shining.

• You say a solar farm owner is thus penalized for non-performance - because it was cloudy the day he predicted it wouldn't be?

• If system operators can curtail a generator when there is too much generation, and there are other generators who have capacity contracts for the same time, is there some process in place to determine who the system operator will curtail or is it up to his discretion?

• If a solar farm owner is paid for being available then is curtailed, why should ratepayers be on the hook for his capacity payment - something for which they receive nothing of value in return?

This kind of perverse dynamic could only be expected when customers are forced to pay for guarantees from suppliers which are worthless, and why electricity rates go through the roof when an attempt is made to integrate supposedly "free" renewables. Customers are paying for a little of something, and a lot of nothing.

Richard Brooks's picture
Richard Brooks on January 26, 2019

Bob, I wrote an article to explain the differences  between capacity payments and electricity prices. Let me know if this makes it clearer: https://www.energycentral.com/c/em/capacity-payments-and-electricity-prices-explained 

The business model is very familiar, if you've ever had to rent a car.

I genuinely appreciate your analysis and questions. Good discussion. Thank you.

Richard Brooks's picture
Richard Brooks on January 28, 2019

Bob,

I do want to address some of the items you raised. You are correct, a solar capacity owner cannot guarantee performance because of uncertainty, i.e. clouds/weather. The same is true with a rental car agency. The agency makes no guarantees that you'll be able to drive the car, because there is always uncertainty. The question is, who bears responsibility during these scenarios. For example, should a rental agency be penalized if you go to drive your rental car only to find that it has been swallowed by a sinkhole? What if you cannot drive because of blizzard conditions and the State declares a state of emergency that prevents people from driving the roadways? Certainly, there are cases when the capacity owner bears responsibility for non-performance, i.e. the engine seizes up making the car useless for the purposes it was acquired.

The bottom line, IMO, is non-performance resulting from cases in which a capacity resource owner is responsible for the failure should have penalties imposed (i.e. the rental car agency/solar farm owner). Non-performance due to circumstances beyond control of the capacity resource owner are part of the “risk” taken by the acquiring party.

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