Should Ontario have a Capacity Market (December 2014)
- 1. 1 SHOULD ONTARIO HAVE A CAPACITY MARKET? INTRODUCTION Criticismof the Ontariopowersector isfar-reaching,andaccusationsgenerallyconvergealong the followingthemes: the Ontariopowersectoriscurrentlyinoversupply due to volatileand contradictorypoliciesandpoorprocurementdecisions,bothpastandongoing. Ontarioconsumersare payinghigherelectricity pricesthan theircounterpartsinNew YorkState and, concurrently, there isa lack of investmentingeneration (themissingmoneyproblem). Wouldthe implementationof acapacity marketinOntariosolve the missingmoney problem, and possibly anyof the otherproblemsmentionedabove? Thispaperwill surveyargumentsonboth sidesof the debate. Afterlistingvariousproblemswiththe statusquo, argumentsinfavorof a capacity marketwill be discussed,layingout specificrecommendations made forthe successful designof a capacitymarket. Finally,argumentsagainstacapacitymarketwill be examined. PROBLEMS WITH THE STATUS QUO While Ontarioselectricitymarketiscommonlyreferredto ashybrid, itlargelyconsists of a principal buyer,the OntarioPowerAuthority(OPA),whose decisionsare largelyshapedbyMinisterial Directives. Consequently,private-sectoractorsare waryor unable to justifyinvestmentwithoutsome formof government-backedcontract. Numerouscommentatorshave deploredthe non-armslength relationshipbetweenOPA/IESO andthe provincial government.1 Observershave heavilycriticizedthe procurementchoicesof the Ontariogovernment. Despite limitedornegative electricitydemandgrowthoverthe pastfive years(2007-2011 inclusive),averaging minus1.1 percentperyear, Ontariosinstalledcapacityhasgrownoverthe same periodby1.8 percent 1 A.J. Goulding,A New Blueprintfor Ontarios Electricity Market, C.D. Howe Institute, Commentary No. 389 at p. 3; George Vegh, Will capacity markets improveOntario Energy procurement? Appro Magazine,August 2014, http://magazine.appro.org.
- 2. 2 annually.2 Asa result,Ontarioconsumersliable topayanadditional 42$ millionto$370 millionperyear beyondwhatisrequiredtomeeta 15 percent reserve marginbetween 2013 and2015.3 It isargued that had the governmentreliedmore oncombinedcycle natural gasturbine electricitygeneration,Ontarioconsumerswouldhave beenable toavoidtheirrelativelyhigh electric bills, whichare projectedtorise overthe next decade,evenwhenthe potentialcostsof buying greenhouse gasemissionscreditsare takenintoaccount. Many observersalsofeel that OntariosFeed- inTariff program, underwhichthe province hascontractedforextensivewindandsolarpowerforsome yearsintothe future, isan unwarrantedadditiontothe currentbudgetdeficit,asit will increase generationtransmissioncosts. The developmentof low-costshalegasinNorthAmerica mayfurther underscore whatmanysee as disappointingprocurementchoices. 4 Aside fromthe aforementionedproblems,the IESOitself hasstatedthat,like manyother wholesaleelectricitymarketsaroundthe world,Ontarioswholesale markethasnotprovensufficient, on itsown,to attract newentrantsintothe systemandto ensure a sufficientlevel of capacity.5 The IESO releasedadraftCapacityAuctionStakeholderEngagementPlan(September11,2014), witha viewof developinghigh-level designbythe endof 2014, detaileddesignthroughout2015, and amendmentsto the Market RulesthereafterinordertoimplementaCapacityAuctionlikelyforthe 2016 or 2017 timeframe.6 ARGUMENTS IN FAVOROF CAPACITYMARKETS 1. Resource adequacyandthe cost of uneconomical investmentdecisions Giventhe large uncertaintiesinfuture electricity marketconditions,suchas customerdemand, fuel prices,emissionscosts, andenvironmentalregulations,there exists anunavoidableriskthatsome 2 Goulding,supra note 1 at p. 9. 3 Ibid. 4 Ibid. 5 IESO, How Capacity Markets Can Provide Reliability,Transparency and DriveDown Costs, Comments by Brian Rivard,Director,Markets, IESO, April 15,2013, Ontario Power Conference, p. 2. 6 Jason Chee-Aloy, Letter to Mr. Brian Rivard,IESO Re: Comments on IESOs Draft Capacity Auction Stakeholder Engagement Plan, p. 1. http://www.ieso.ca/Pages/Participate/Stakeholder-Engagement/Capacity-Auction.aspx
- 3. 3 investmentdecisions aroundresource adequacy willturnoutto be uneconomical. Anexample is new generation whichmaybe builtbefore itisneeded, orbecome uneconomical afterthe fact,suchas coal plantsbuiltwhennatural gasprice forecastswere veryhigh,butwhichbecame uneconomical after natural gas pricesdropped. Undera traditional,verticallyintegratedelectricitysystem,such uneconomical decisionsare bornbyrate-payers. The costs are recoveredinregulatedretailrates,even if theyexceedmarketprices.7 In a liberalized,market-basedenvironment, suppliers bearmostof those risksandlose money on anygenerationinvestmentthatlaterprovesuneconomical()8 . However,market-based mechanismstoresource adequacycanonlyattract supplyinvestmentsif pricesare highenoughfor suppliertoexpectasufficientreturnoninvestment. Itisarguedthat a capacitymarket, whichpromises capacity-contractrevenue inthe future (inadditiontoenergy-marketrevenuesfromdeliveringpower) createsincentivesforprivate entrepreneurstodevelop generation. The projectdevelopersbearkey risksinrelationtosuch projects,suchas capital cost over-runs,whichcanbe significantfornuclear- relatedprojects, ornotobtainingrequiredpermits.9 2. RationalizingReliability Some wholesalepowermarkets,referredtoasenergy-onlymarkets,donotimpose resource adequacyrequirementsandassociatedplanningreservemargins atall (Texas(ERCOT),Alberta, AustraliasNationalEnergyMarketandScandinavia),andnew generation isbuiltonlywhensuppliers believethatthose investmentswill be profitable. Inotherwords,there isnoguarantee thatenough generationwillbe builttomaintainacertainreserve marginorresource adequacylevel onaverage over time.10 A comparisonof these twoapproaches crystallizesthe dilemmabehindwhetherornotto implementacapacitymarketundera liberalizedelectricitysector:isthe possibilityof shortagesand price spikes underanenergy-onlymarketpreferable to reliabilitystandards whichforce all customersto 7 Kathleen Spees, Capacity Markets Lessons Learned from the FirstDecade, Economics of Energy & Environmental Policy,Volume 2, Issue2,September 2013 at p. 4. 8Ibid. 9 Michael Wyman, C.D. Howe Institute, Rethinking Ontarios Electricity System with Consumers in Mind, E-Brief, September 4, 2014 at p. 6. 10 Supra note 7 at p. 5.
- 4. 4 pay a highprice for maintainingacertainreserve margin,whethertheyplace ahighvalue onthat level of reliabilityornot? In theory,a perfectlydesignedenergy-onlymarketcorrectsthisproblembyallowingcustomers to choose the level of reliabilitytheyare willingtopayfor. Customersthatplace a low value on reliabilitycouldreduce theirconsumptionwhenevermarketpricesrise tounacceptable levels,while customersthatplace a highvalue onreliabilitymaycontinuetoconsume powerevenatveryhigh prices. Asstatedby SallyHunt, the lack of customerresponse isthe reasonforworriesaboutreliability. Adequate attentiontodemandresponse wouldremove the needforcapacity markets,installedcapacity requirements,price caps,andotherholdovers fromregulation.11 However,today, mostreal-world wholesalepowermarketsdonotcurrentlyhave sufficientlevelsof demandresponse toachieve efficient levelsof resource adequacy.12 3. Technological Neutrality As previously mentioned,whileOntario chose central contracting,most deregulatedU.S. jurisdictionschose capacitymarkets,suchthatinadditiontoreceivingspotenergypriceswhentheyrun, mostgeneratorsinthe NortheasternUSalsoreceive paymentsforbeingavailable torunat some period inthe future.13 Comparedto OPA-administered20year PowerPurchase Agreements(PPAs),some argue that a capacitymarketcouldbettermatch demand of new powercapacitywithhow muchand whattype of supplymaterializes,resultinginlessexcesscapacityandlowerpricesforconsumers. Policy choicescouldalsobe accommodatedthrougha capacitymarket,such as small-scale renewableenergy projects. But20-year PPAsresultinOntariorate-payersretaininglarge degreesof riskinrelationtothe price and quantityof powerprocured.14 Currently,Ontariodeterminesthe mix of fuels(suchasgas versuscoal,nuclear,andrenewable power) throughcentralizedprocesses,which includesthe Long-TermEnergyPlansetbythe Ministryof Energyand political level decisionmaking. 15 In contrast,in a capacity market,the overall fuel mixis determinedbymarket-basedmechanisms. These canhoweverbe supplementedbyanygovernment- 11 Sally Hunt, Making Competition Work in Electricity, New York: John Wiley and Sons,2002 at p. 76. 12 Supra note 7 at p. 5. 13 Supra note 9 at p. 3 14 Ibid. 15 Supra note 9 at p. 5.
- 5. 5 establishedenvironmental regulationsandemissioncontrols. The mix of generationthatprevailsin capacitymarketauctionsthenmeetspolicygoalsinaneconomicallyefficientmanner,andthe particular mix isa result. Arguably,market-basedmechanismssuchascapacitymarketsdoa betterjobthan central procurementatidentifyingthe optimalfuelmix.16 4. Transparency To relyon a capacitymarket,rather thanlong-termPPAs,wouldlikelyleadtolesscloseddoor decisionmakingandmore transparencywhileincentivizinggenerationinvestmentgenerally.17 THE SPECIFICDESIGN FEATURES OF A SUCCESSFUL CAPACITYMARKET Joskow suggestsseveraldesignfeaturesto improve energy-onlywholesalemarket performance:18 1. Raise the price caps on energyandoperatingreservesduringscarcityconditions. Joskowclaimsthe $1000/MWh price cap in effectinmostof the organizedmarketsinthe U.S.is a completelyarbitrarynumberthatisclearlybelow whatthe competitive marketclearingprice would be undermost scarcityconditions. Thiscappreviously keptrealizedcapacitypaymentsbelow the level necessarytomake up forthe netrevenue gaprealizedonwholesale energyandoperatingreserve marketsafterliberalization. The newcapacitypaymentmechanisms,onthe otherhand,retainaprice cap to deal withpotential marketpowerproblems,butthe price capis basedonan analysisof the probabilitydistributionsof supplyanddemand. Asaresult,the proposedannual capacityprice cap includedinthe forwardcapacitymarketadoptedforthe New EnglandISOismore than twice the old deficiencypaymentcap. 2. Require pricestorise automaticallytothe price capwhensystemoperatorstake outof marketactionsto deal withoperatingreserve deficiencies. 16Supra note 9 at p. 5. 17 Supra note 9 at p. p. 6. 18 Paul Joskow, Capacity Payments in Imperfect Electricity Markets: Need and Design, December 5, 2007 at p. 22.
- 6. 6 Under the Ontariomarketrules,the IESOis allowedtouse out-of-marketcontrol actionswhen there isnot sufficientoperatingreservedofferedinthe market. These control actionsincludea3% voltage reduction,a5% voltage reduction,anda reductionof 30R requirements. Observershave argued thisfreeservice couldaffectintegrityof the price signalssenttothe supplyside,puttingunrealistic downwardpressure onthe HOEP19 (whichresemblesthe spotmarketprice inotherderegulatedenergy marketsinNorthAmerica, and isthe price that determinesthe orderinwhichthe IESOdispatches generators )20 . Furthermore,out-of-marketcontrol actionshave beenrecognizedasone of the main sourcesof discrepancybetweenpre-dispatchandreal-time prices.21 Joskowclaims thatinorderto make the higherprice caps meaningful,itwouldmake sense toadopta rule thatwheneverasystemoperator issuesanotice that operatingreserve deficiencyprotocolswill be implemented,the wholesale market pricesforenergyandoperatingreservesbe movedimmediatelytothe price cap. Thiswould deal with the price formationproblemsthatemerge whensystemoperatorsimplementreliabilityprotocols duringcapacityconstraints. He arguesthat thisisa rough and readymechanismtogetpricesupcloser to where theyshouldbe underscarcityconditions,while atthe same time allowingthe implementation of emergencyresponse protocols,suchasvoltage reductions, andgivingsystemoperatorsthe discretionarybehaviorthattheymayneedto maintainnetworkreliabilityandavoidnetworkcollapses.22 3. Increase real time demandresponseresources Like SallyHunt,Joskowbelievesthateffortsmustbe increased tobringmore demandresponse that meetsthe systemoperatorscriteriaforcountingonitduringscarcityconditions,andthatthis can alsohelpbothto increase the efficiencywithwhichcapacityconstraintsare managedandimprove the price formationprocessduringscarcityconditions. Demandresponse shouldbe anactive componentof the pricesformationprocessandcompete directlywith resourcesonthe supplyside. Demandresponse resourcesthatare compatible withthe systemoperatorsreliabilitycriteria shouldbe compensatedatlevelsequivalenttowhatis paidto generatorstomake capacityavailable duringcapacityconstrainedperiods.23 He believesthe bestwayforthisgoal tobe achievedisto 19 Hamidreza Zareipour,Claudio A. Canizares and Kankar Bhattacharya,The Operation of Ontarios Competitive Electricity Market: Overview, Experiences and Lessons, https://ece.uwaterloo.ca/~ccanizar/papers/HamidOntario.pdf 20 Supra note 9 at p. 2. 21 Ibid. 22 Supra note 18 at p. 23. 23 Supra note 18 at p. 34.
- 7. 7 structure demandresponse contractsascall contracts in whichcurtailmentsare contingenton wholesalepricesrisingtopre-specifiedlevels. 4. Increase the numberof operatingreserve productssoldinorganizedwholesalemarkets. Criticsof capacity auctionsargue that while the megawattisaninterchangeable product, notall capacityis the same. Traditional resource procurementreadilyallowsforaccommodationof different leadtimes,differentoperatingcharacteristics,differentpolicygoals(i.e. renewable energy)andthe developmentof a diversifiedportfolio. Theyclaimthatall of these considerationsare scrappedwhen an auctionforcesa standardizedproduct.24 Joskow alsobelievesthatmarketperformance wouldalso be improvedif marketdesignsrecognizedthatsystemoperatorsneedmore refinedproductsthanare presentlyreflectedinthe ancillaryservice productsdefinitionsaroundwhichwholesalemarketsare now organized. Forexample,if the systemoperatorneedsquickstartsupply(ordemandresponse) resourcesthatcan supplywithinfive minutesratherthanten minutes,itisbettertodefine thatasa separate productand to create a marketfor itthat is fullyintegratedwithrelatedenergyandancillary service productmarketsratherthanrelyingonout-of-marketbilateral arrangements andmustrun schedulingatthe bottomof the bid-basedsupplystackregardlessof the marginal operatingcostsof these must-rununits.25 5. Reviewandadjustreliabilityrulesandprotocols Joskowbelievesthatthe assessmentof whatissufficientreserve and investmentcurrently rests on traditional engineeringreliabilitycriteria,andshouldbe reevaluated,as thisiscarriedoverfrom the oldregime of regulatedverticallyintegratedmonopolies,which he believes reflectpasteffortsby verticallyintegratedutilitiestojustifyexcessgeneratingcapacity. 6. Usingforwardcapacity marketmechanisms. Joskowbelievesthatif properlydesigned,forwardcapacitymarketscanact as a safetyvalve to fill the netrevenue gapthatleadstothe missingmoneyproblem, andthatthe new capacity 24 Cliff Hamal and Ian Smyth, Dabbling in Capacity Markets:The how-to guide to increasingOntarioselectricity costs, Appro magazine, August 2014 at p. 2, http://magazine.appro.org/ 25 Supra note 18 at p. 24.
- 8. 8 obligations,capacityauction,andpaymentmechanismsinNew EnglandandPJMrespondtothis problembyturningthe capacityauctionsintoforwardmarketsforcapacity that occur sufficiently farin advance of deliveryfornewentrantsto participate. InNew England,forexample,the capacityauction will be forcapacitythat is to be available tothe marketoverthree yearsinthe future.26 Criticsagree that the three-yearforwardbasisof the PJMand ISONew Englandauctions supportsnewgeneration,and commitmentstoconstructcan be made followingthe auction. But they claimthiscreatesmajorproblemswithcapacitysuppliersthatworkonthe demandside,because customerstypicallydonotcommittosuch actionsuntil onlypriorto delivery.27 Forimports,the problemshave beenthree-fold:ensuringthatgeneratorsare actuallystandingbehindthe commitment made yearsin advance,ensuringthattransmissionsystemcanaccommodate the entiretyof the importedcapacityandensuring long-termresource adequacyismaintainedatareasonable costwhen importedcapacitycan enterandexitona yearlybasis. 7. Avoidingthe mistakesof the earlyauctions Joskowalsocautionsagainstrepeatingthe mistakesof the earliestcapacityactions. For example,he is againstusingahard value forthe reserve margin,andanimpliedquantityof installed generatingcapacitytomeetreliabilitycriteria. He notesthisledtoveryvolatilecapacitypricesthat jumpedbetweenclose tozeroandthe price cap from yearto year. The New YorkISO has introduceda reserve demandcurve thatessentiallysmoothescapacitypricesaroundthe targetgeneratingcapacity reserve margin.28 He alsopromotes lockingincapacitypricesforanytime periodinadvance of completion,such as inthe NewEnglandforwardcapacitymarket, where paymentmechanismallowsnew entrantsto lockin capacitypricesdeterminedinthe auctionfora periodof upto give yearsafterthe forward capacitydeliverydate attheirchoice.29 In the past, generatorshadpoor incentivestobe available duringhourswhencapacityis constrainedbecause capacitypaymentswere nottiedtoactual performance duringthese hoursbut 26 Goulding,supra note 1 at p. 31. 27 Supra note 24 at p. 2. 28 Supra note 18 at p. 31. 29 Goulding,supra note 1 at p. 31.
- 9. 9 rather tohistorical availabilityexperience. New mechanisms mustinclude penaltiesforgeneratorswho are notavailable to supply whentheyare mostneeded.30 Finally,pastcapacityobligationswere appliedforthe systemoperatorsentire network,and did not reflecttransmissioncongestion, local reliabilityandassociatedinstalledcapacitycriteria. The new capacitymarketmechanismsallowforcapacityobligationsandcapacitypricestobe determinedfor sub-regionswhere there are congestionproblems. ARGUMENTS AGAINSTA CAPACITYMARKET IN ONTARIO 1. More litigationthancompetition Criticshave allegedthatcapacitymarkets sufferfromaproblemthatmathematicianswouldcall beingover-constrained: while individualchallengescanbe resolved,thereisnowayto addressthe combinationof challengesall atthe same time.31 Theyclaimthat nocapacity marketworkswell,and that itshistoryisa saga of the never-endingneedforchange andmodification,alongwiththe consistentcomplaintof pricesbeingtoohighortoo low (orboth),and reliabilitynotbeingassured. This observationhasbeenmade inotherforums,where observershave statedthatCapacitymarketsare the most controversial elementof marketdesign,withcriticismdirectedatthemona continuousbasis fromvirtuallyall sides. Theycontinue tosurvive,however,becausenoone hasyetimplementeda bettermousetrapformaintainingreliabilityinfully-restructuredmarkets. The primaryalternativeisto remove orraise caps on energyandoperatingreserve pricesduringtimesof scarcity,butthere are political challengestodoingso.32 The critics cautionthat noone should expectcompetitiontoact freelywithoutfurther changes,despite the marketparticipationinthe process. Pricesare notthe resultof competitive bargaining,butthe resultof complicatedrulesdevelopedinhighly-contestedprocesseswhere critical issuesare oftenresolvedbythe regulator,notthe marketplace.33 2. No ConsumerParticipation 30 Supra note 18 at p. 32. 31Supra note 24 at p. 1. 32 John S. Moot, Subsidies,ClimateChange, Electric Markets and the FERC Energy Law Journal, vol.35, November (2014) at p. 350. 33 Supra note 24 at p. 2.
- 10. 10 Criticsargue that consumerparticipation hasbeenabandonedforadministrativedemandcurve, whose exactshape andparametersare alwaysintenselydebated,withcontroversiesoverinflection pointsandslope anglesmerelyemphasizingthe non-marketnature of the mechanism.34 3. Market Power Of particularissue toboththe critics andJoskow are marketpowerproblems. Giventhatthe exactamountof capacitythat is neededcan be determinedwithprecision, everysupplierhasmarket power,because eachcouldwithholdandcreate ashortage. Buyerscouldprofitablydepresspricesby contractingto have a little extracapacitybuilt. Joskow pointstomarketruleswhichhedgeenergyprices duringpeakperiods,and establishingforwardpricesforcapacityfora periodof five yearsaswaysto reduce the incentivesof suppliertoexercise marketpower.35 However,the criticspointtothe annual reportsof the PJMMarket Monitor whichdetail the severe marketpowerproblems, andmake clearthere isnoexpectationthatsufficientexcesscapacity will everbe builttosolve the marketpowerproblem.36 Again, criticspointto marketrulesand regulatoryinterventionsattempttominimizethiskindof behaviorasrunningagainstthe very competitionthatcapacitymarketsare supposedtoembody. Bywayof example,inanarticle entitled Buyer-sidemitigation in organized capacity markets:timefor change?37 ,the authorsargue that FERC has beenoverlybroadinitsimplementationof buyer-side mitigationrulesbyrequiringeverynew entrantto prove that itsfacilityiseconomicorbe subjectto an offerfloor, todetersubsidizationof new entrythat couldunduly depresscapacitymarketprices. In whatthe critics condemnasthe circular logicthat underpinsthesemarkets,market performance isgenerallyassessedonthe basisof whetherthe final pricesmeetthe designers expectations,withfurtheradjustments made asnecessary.38 4. Financing 34 Supra note 24 at p. 3. 35 Supra note 18 at p. 35. 36Supra note 24 at p. 3. 37Richard B. Miller,Neil H. Buterklee and Margaret Comes, Buyer-Side Mitigation in Organized Capacity Markets: Time for a Change? Energy Law Journal,vol.33 (2012) at p. 449. 38 Supra note 24 at p. 3.
- 11. 11 Ultimately,the criticsbelieve thatthe complexity inherentinacapacitymarket justincreases the volatilityof revenue togenerators,makingitmore costlytoraise capital. Giventhatelectric generationis extremely capital intensive,stable revenuesallow lower-costfinancing. Whenlongterm bilateral contractsare available, whywouldone shifttocapacitymarkets thatsignificantlydecreases revenue stability andultimatelydrives upthe costof the capacityproduct that isbeingpurchased. To lowerthe costof capital,the UK marketstructure will allow forthe auctiontoclear withcommitments for paymentsupto 15 yearslong,butthisjustraisesproblemsof price discriminationandshowshow marketrulescan preventfairprices.39 CONCLUSION If the primarymotivationbehindthe introductionof capacitymarketsistomeet administratively-determinedresource adequacystandardswithinliberalizedelectricitymarkets,where generationinvestmentdecisionsare made by private sectorinvestors ratherthanpublicbodies, then the record showsthatcapacity marketscan workto meettheirdesignobjectivesbutthata numberof challengesstill needtobe addressed.40 In addition,capacitymarketsmayalsobe designedtoachieve otherpolicyobjectives,suchasreducinginvestmentrisk,promotingcompetitionamongsuppliers,and comingto more rational decisionsaroundreliabilityversus investmentcosts.41 Othersare lessenthusiastic:Economistslove the auction-basedmechanism, butmost consumerswhoenduppayingthe billscouldcare less () The push forcapacity marketscame in restructuredmarketswhere energyrevenuesalone were thoughttobe insufficienttoprovide adequate returnto newinvestment. Absentmore money,new generatorswouldnotgetbuiltwhenneeded. This shortfall isoftenreferredtoasthe missingmoneyinelectricitymarkets. Capacity marketshave been adoptedtofill thisgapand the three RFOsnow oversee the transferof billionsof dollarsayearfrom consumerstosuppliers. Forsome suppliers,thismoneyalone issufficientproof thatmarketsare workingandsolvingtheirmissing moneyproblem. Forsome consumers,however,the termmissing moneyhastakenon a newmeaningastheyare leftwonderingwhatvalue theyhave receivedforall of the moneytheyare now missing.42 39 Supra note 24 at p. 4. 40 Supra note 7 at p. 2. 41 Ibid. 42 Supra note 24 at p. 2.
- 12. 12 Here in Ontario,opinion remaindividedaswell. Some argue thatthe timingis perfect, as announcingthe governmentsintenttoimplementacapacitymarketwouldsetthe stage forplanning the endof central procurement,whichwasnotintendedtobe a permanentfixtureof the Ontario powermarket,viaa phased-inimplementation. Announcingthe commitmenttoacapacity market aheadof time wouldgive ittime tobuildcredibility.43 However, itisnotclear that Ontarioelectricitysectorstakeholdersare wonoverto capacity markets. Industrygroupsclaim that IESOhas initially placedtoomuchemphasisondevelopmentof a CapacityAuction,() andhasnot adequatelyexploredotherprocurementmechanisms/options(e.g. enhancementstowholesale energymarketpricingthatmore accuratelyvalue resourcesduringtimesof scarcity,multi-yearcontracting,differentmethodstoconductauctionsforspecificresources,etc.) to helpmeetfuture powersystemsupplyneeds.44 The perceptionthatIESOhasnot effectivelydiscussed issuesthatpresentlyexistwithCapacityMarketsinthe U.S.,suchas NYISO,ISO NE andPJM, where not all resources(e.g.,energystorage,newgenerationprojectsthatare not fueledbynatural gas,etc.) have participatedwithinthese markets, suggeststosome thatsignificantbarriersto entryexist. Stakeholders urge the IESOto revisitthe initial scope of the StakeholderEngagementPlanttobeginwithproperly listing,reviewingandassessingpotential procurementoptions before rushingtocopythe U.S. capacity marketmodel.45 Finally,itshouldbe notedthatsome see acapacityauctionas but one stepin transitioningthe Ontariopowermarketto a sustainable situationthatwould produce long-run,leastcostpowersupplies for consumers. Otherstepsincludestrengtheningthe autonomyof powersector, addressingthe role of nuclear,creatingloadservingentities(LSEs)outof local distributioncompanies,whowouldbe participantsinthe capacitymarket,and reallocate capacityfromexistingOPA contracttoLSEs withall subsequentcontractingdrivenbyLSEperceptionsof needrelative totheir capacity market responsibilities, amongotherinitiatives.46 43 Supra note 9 at p. 7. 44 Supra note 6 at p. 1. 45 Ibid. 46 Goulding,Supra note 1 at p. 15.
- 13. 13 References Chee-Aloy,Jason,LettertoMr. BrianRivard,IESO Re:CommentsonIESOsDraft CapacityAuction StakeholderEngagementPlan, http://www.ieso.ca/Pages/Participate/Stakeholder- Engagement/Capacity-Auction.aspx Goulding, A.J., A NewBlueprintforOntariosElectricityMarket,C.D.Howe Institute,CommentaryNo. 389. Hamal,Cliff andIan Smyth, DabblinginCapacityMarkets:The how-toguide toincreasingOntarios electricitycosts,Appromagazine,August2014, http://magazine.appro.org/ Hunt,Sally Making Competition Workin Electricity, New York: JohnWileyandSons, (2002). IESO,How CapacityMarkets Can Provide Reliability,TransparencyandDrive DownCosts,Comments by BrianRivard,Director,Markets,IESO,April 15, 2013, OntarioPowerConference. Joskow,Paul , CapacityPaymentsinImperfectElectricityMarkets:NeedandDesign,December5, 2007. Miller, RichardB., Neil H.Buterklee andMargaretComes,Buyer-SideMitigationinOrganizedCapacity Markets: Time fora Change?EnergyLaw Journal,vol.33 (2012) at p. 449. Moot, JohnS.,Subsidies,Climate Change,ElectricMarketsandthe FERC EnergyLaw Journal,vol.35, November(2014). Spees,Kathleen ,CapacityMarkets LessonsLearnedfromthe First Decade,Economicsof Energy& Environmental Policy,Volume2,Issue 2,September2013. Vegh,George ,Will capacitymarketsimprove OntarioEnergyprocurement?ApproMagazine,August 2014, http://magazine.appro.org. Wyman,Michael,C.D.Howe Institute,RethinkingOntariosElectricitySystemwithConsumersin Mind,E-Brief,September4,2014. Zareipour,Hamidreza, ClaudioA.CanizaresandKankarBhattacharya,The Operationof Ontarios Competitive ElectricityMarket:Overview,ExperiencesandLessons, https://ece.uwaterloo.ca/~ccanizar/papers/HamidOntario.pdf