Do Competitive Electricity Markets Adequately Support Renewable Energy and Energy Efficiency?

E&E News PM
August 22, 2011

New England lawmakers seek probe of competitive market structures
Hannah Northey

E&E reported yesterday that three New England lawmakers (including Senator Joe Lieberman of Connecticut and Senator Susan Collins of Maine) sent a letter to the Government Accountability Office (GAO) questioning whether the competitive electricity markets are supporting renewable generation and energy efficiency measures. The issue raised in the letter focuses primarily on the need for long-term contracts to support new generating sources rather than the short-term approach followed by most regional transmission grid operators through their capacity markets. Capacity markets rely on a yearly bidding process, and the outcome of that process informs grid operators about the price of capacity and whether new generation capacity is needed. According to the letter, “some market observers and independent companies argue that the optimal means to ensure a supply of new cleaner energy to meet future needs is to arrange long-term contracts (at least 10 years). Experience with obtaining financing for new power plants and renewable energy facilities demonstrate[s] that a long-term contact with a stable revenue stream is frequently a prerequisite for securing financing for these projects.” Although some states require their electric utilities to offer long-term contracts, most regional wholesale markets provide very limited opportunity for long-term bilateral contracts between clean energy developers and purchasing utilities. The letter to GAO requests assistance in examining the impacts of regional competitive electricity markets on the availability and use of long-term contracts “to support the development of new generation capacity, including and especially renewable energy, demand response resources and energy efficiency.”

From the experience of this writer, the concern is a legitimate one. In representing clean energy developers participating in the markets operated by the New York Independent System Operator, there were limited opportunities for clean energy developers (renewable energy, demand response providers, and energy efficiency) to participate in the capacity markets, particularly for longer-term arrangements. Energy efficiency, for example, was not able to bid into the process, and the yearly capacity auctions would have produced only a one-year capacity payment stream for developers in any event. That fails to capture the long-term benefits of energy efficiency investments. And without a long-term commitment, such as through a 10- to 15-year contract, there is too much risk associated with renewable energy investments, and clean energy developers cannot get the financing to build their projects. The counter-argument is also worth noting: If regulators require utilities to enter into such long-term arrangements, then utilities (and their customers) will bear the risks of these commitments in the event wholesale prices drop and the terms under such contracts turn out to be “above market” and therefore uneconomic. The existing capacity markets arguably capture dynamic market conditions and ensure that prices reflect current market value, irrespective of whether some resources are environmentally preferable over others.

It has proven to be a significant challenge in virtually all the competitive wholesale markets to develop a capacity market that results in price signals certain enough that will attract the investment to support capacity additions. The problem is not limited to renewable energy generation and energy efficiency measures. But these resources are the “new kids on the block,” and do not have the benefit of owning the embedded thermal generation for which the transmission grid was built. It will be interesting to see whether the letter results in any action by the GAO and, if so, whether the resulting examination sheds any new light on an issue that has vexed clean energy developers trying to get a foothold in competitive electricity markets.