The Procrustean bed of mandatory capacity markets
Remember the story of Procrustes from Greek mythology? He had an iron bed on which he invited passersby to spend the night. If his guest was shorter than the bed, he stretched them by hammering or racking the body to fit. If the guest was longer than the bed, he cut off the legs to make the body fit the bed’s length. In either event, the guest died. Ultimately, Procrustes was slain by his own method, ending his reign of terror.
For too long now, consumer-owned electric utilities in the East have been forced to lie in the Procrustean bed of mandatory capacity markets operated by the Eastern regional transmission organizations – PJM, ISO New England, and the New York ISO.
These markets are not working – the impact is evident in higher-than-necessary consumer prices and a damper on new generation required to meet changing needs.
RTO-administered capacity constructs have not been able to attain a mature, or even stable, state. They are deeply flawed – these are not even “markets” in any meaningful sense of the word. They are a form of centralized procurement based on a heavily mitigated pricing structure. We should not fool ourselves into thinking they are anything else.
The American Public Power Association has had doubts about capacity markets from their inception, primarily because we thought consumers would end up paying too much for capacity. Eight years later, we think that consumers have felt the adverse impacts. We also know that these capacity constructs are not incenting much new generation.
The electric utility industry is capital-intensive. New wholesale electric generation capacity of almost every sort requires some type of cost recovery over a period of years to support the financing of its construction cost at a reasonable capital cost.
Yet the current RTO-administered capacity constructs are shorter-term in nature – and are subject to the economics existing at each auction interval, such as low natural gas prices and locational boundaries, which create substantial price volatility from auction to auction. Capacity constructs are not well-suited to support longer-term investments. And given coming changes in the regulations applicable to fossil-fueled power plants, new investments are definitely needed.