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January 20, 2010
Brattle Conducts Review of Capacity Market for the Midwest ISO: Identifies Successes and Recommends Refinements
A report released today by the Midwest Independent Transmission System Operator (Midwest ISO) and prepared by consultants at The Brattle Group provides the first independent assessment of the Midwest ISO’s new resource adequacy construct, identifying several major successes and a series of recommendations for further improvement. The major successes identified include, first and foremost, the Midwest ISO’s effective implementation of a comprehensive resource adequacy (RA) construct, with four major components: an RA requirement imposed on load-serving entities (LSEs) with financial enforcement provisions; resource qualification and performance requirements that accommodate all resource types, including demand-side resources; a standardized capacity product called “Planning Resource Credits” to support liquidity in trading; and a voluntary capacity auction for settling imbalances just before each delivery month. Second, the premier planning year under this construct has proceeded smoothly, although this might be attributed in part to the existing excess supply conditions. Third, the Midwest ISO has implemented an industry-leading scarcity pricing mechanism that will help support resource adequacy through energy and ancillary markets when market conditions become tight. The report identifies several opportunities for improvement, including:
  1. Locational resource adequacy: The Midwest ISO’s current design will rely partly on out-of-market mechanisms for locational resource adequacy in transmission-constrained zones. To improve the design, the Midwest ISO should consider implementing local sourcing requirements.
  2. Load forecasting: The current use of load-serving entities’ non-coincident peak load forecasts to set resource adequacy requirements may create incentive problems and accounting gaps. The Midwest ISO should consider developing its own coincident peak load forecasting capability.
  3. Load tracking: Load migration in retail choice states is not tracked, so migrating customers may temporarily not be included in any LSE’s resource adequacy requirement. The problem could be resolved by developing a tracking and settlement system that accounts for load migration in a timely manner.
  4. The reliability target: The “1 day in 10 years” loss of load expectation reliability standard, which is used as the basis for setting resource adequacy requirements, has not been sufficiently evaluated for economic efficiency. If the target is not economically efficient, it could lead to costly over-investment or under-investment in capacity resources. The Midwest ISO should consider conducting an assessment of an efficiency standard, and work with the North American Electric Reliability Council (NERC) regional entities to revise the current standard if necessary.
  5. Investment/retirement monitoring: It will be important to monitor capacity investments and retirements over time, particularly in retail choice states, to ensure that the next round of capital investments will be made when and where needed.
The report, “Midwest ISO’s Resource Adequacy Construct: An Evaluation of Market Design Elements,” was authored by Brattle consultants Samuel Newell, Kathleen Spees, and Attila Hajos, and is available for download below. The report incorporates extensive stakeholder input and review, which the authors gathered through focus group meetings with each of the nine stakeholder sector groups, written comments, and presentations to the Midwest ISO’s Supply Adequacy Working Group.