Analysis: Capacity markets draw state scrutiny

OREANDA-NEWS. Capacity prices in US wholesale power markets are starting to rise after a long period of decline, but the resulting increase in utility bills has resulted in political backlash from elected officials.

Power plants in regional transmission organizations can make money by selling energy and ancillary services or by taking an obligation to make capacity available for future dispatch. An overbuild of capacity in early 2000s and flat load growth depressed capacity prices at the same time as low natural gas prices have kept a lid on wholesale power prices. But the trend in capacity markets is starting to reverse in the northeast and midwest as generation retirements loom.

The recent nine-fold increase in capacity prices in southern Illinois, during the 2015-16 Midcontinent Independent System Operator auction, led to inquiries from Illinois lawmakers and other officials. Lawmakers' ire in part reflects insufficient knowledge of how capacity markets operate, Exelon senior vice president for government and regulatory affairs Joseph Dominguez said yesterday at a US Energy Association event in Washington, DC. "The interplay between energy and capacity is not easily understood," he said.

The spike in capacity prices translates into a much smaller increase for Illinois consumers, Dominguez pointed out. And that price still trails levels set in recent PJM and New England auctions. Capacity in parts of New England earlier this year cleared at a level double that of the Illinois price.

New England lawmakers and politicians likewise expressed consternation, calling in Independent System Operator officials and federal energy regulators to explain why capacity prices should have spiked in the past two auctions. New York politicians last year opposed creation of a new capacity zone in the lower Hudson valley.

But state lawmakers are not likely to compromise reliability-driven goals that underwrite the capacity market concept, Dominguez said.