Brattle consultants Hannes Pfeifenberger, Sam Newell, Kathleen Spees, and Roger Lueken have authored an open letter in response to a series of questions on the state of U.S. electricity capacity markets posed by members of the United States Senate’s Committee on Energy and Natural Resources.
On November 19, 2015, U.S. Senators Lisa Murkowski and Maria Cantwell issued a letter to the U.S. Government Accountability Office (GAO) requesting that the GAO examine the efficacy of capacity markets. In particular, the letter raised questions asking how capacity markets affect reliability, costs, and the generation mix compared to traditionally regulated systems.
In an open letter addressed to the GAO, the Brattle consultants offer responses to the questions posed based on their experience with reviewing the effectiveness of U.S. capacity markets over the last decade in a number of previous assignments with independent system operators. The letter notes that while the design of U.S. capacity markets leaves room for improvement, they are generally performing well. The capacity markets have also succeeded in what they have been designed for – to address “resource adequacy” challenges faced by the industry – by attracting low cost capacity from a large range of different resources, including uprates to existing generating plants, demand response, imports, and investment in new generating plants. Although capacity markets have been recently hit with several threats to reliability – including environmental regulations and gas pipeline constraints – the authors agree that both capacity markets and traditionally regulated systems will continue to address these challenges with appropriate reforms to maintain their resource adequacy standards.
The letter also outlines several recommendations for capacity market design, including: structuring market rules so that all types of capacity can compete on even footing; employing downward-sloping demand curves in order to better mitigate price volatility and the ability to exercise market power; and holding forward auctions every three to four years prior to delivery to help set market expectations, reduce price volatility, increase market transparency, and help investors time their entry.
The open letter was prepared independently by the Brattle economists and not on behalf of any client or sponsoring organization. It is available for download below.