"It's evident that the mandatory capacity markets are not delivering benefits to electricity customers. They are not even markets," said APPA President and CEO Sue Kelly. "Billions of dollars are flowing from the pockets of bill-paying customers to generators and capacity providers, and our study shows that the vast majority of these dollars are being spent to prop up a market structure that does not work. At some point, we just have to stop the music."
The capacity market makes payments to generators to ensure their availability to meet demand. It's supposed to supplement the earnings of generators to act as an incentive to build new generation to supply a robustly competitive market that saves consumers money.
Capacity payments are a part of your electric bill, albeit a small part, but collectively they cost consumers millions.
Regional transmission organizations cannot order new generation to be built in order to supply needed capacity. Instead, they created this screwball market that is supposed to provide financial incentive for new generation to develop where electricity prices are high. It doesn't work, says APPA.
The APPA study underscores a central flaw in the mandatory capacity markets -- they do not support the stable long-term financial arrangements required to build new power plants. As the electricity industry faces new challenges from environmental regulations, baseload retirements, and an increased reliance on natural gas, it is crucial that the RTOs and the Federal Energy Regulatory Commission (FERC) revisit the mandatory capacity markets paradigm, APPA says.
Look at what happened when an oversupply of cheap gas generation flooded PJM's market. Capacity prices tumbled and a lot of old, inefficient generators were retired because they could no longer compete. Some plants that couldn't compete were "sold" into the generator's regulated affiliate distribution companies, such as FirstEnergy's Harrison or AEP's Mitchell, where ratepayers will pick up the tab for the plant's operating costs and become speculators in PJM's capacity market. In the Harrison case, the WV PSC conditioned its approval on the market price of Harrison's excess capacity being high enough to cover the merger acquisition premium being charged to customers in West Virginia.
PJM pretends its capacity market encourages development of sufficient generation but hedges that bet by ordering new transmission lines to supply electricity to constrained or expensive load pockets long before local generation even has a chance to develop.
So, what's APPA's solution?
APPA encourages approaches to resource development that incorporate long-term planning, bilateral contracting, utility ownership, and demand-side approaches, and continues to advocate that the FERC mandate a transition from mandatory capacity markets to voluntary residual markets, where states and local public power and cooperative utilities will be able to procure the capacity they need through bilateral contracts -- allowing states and utilities to determine the optimal mix of resources and structure their portfolios to lower costs, maximize reliability and be good environmental stewards.