APPA: Mandatory Capacity Markets Not Favorable to New Power Plant Construction

October 14, 2014

Press Release

Contact Tobias Sellier at 202-467-2927 or mediarelations@publicpower.org for a copy of “Power Plants Are Not Built on Spec: 2014 Update” and to schedule interviews with the authors. Data tables from the study can be provided separately upon request.

Washington, D.C., October 14, 2014 – A study released today by the American Public Power Association (APPA) has found that at most, only 2.4 percent of generation capacity (including new facilities for which no contract-related information could be found) constructed in 2013 was developed solely for sale into organized electricity markets.

The paper, “Power Plants Are Not Built on Spec: 2014 Update,” points out that almost all new generation capacity in 2013 was financially supported by long-term power purchase agreements or ownership. Only 6 percent of all capacity constructed in 2013 was built within the footprints of one of the regional transmission organizations (RTOs) with mandatory capacity markets.

“It’s evident that the mandatory capacity markets are not delivering benefits to electricity customers. They are not even markets,” said APPA President and CEO Sue Kelly. “Billions of dollars are flowing from the pockets of bill-paying customers to generators and capacity providers, and our study shows that the vast majority of these dollars are being spent to prop up a market structure that does not work. At some point, we just have to stop the music.”

The study reviewed the financial arrangements behind the construction of new generation capacity of 14,738 megawatts (MW), or 94 percent of the total capacity constructed in 2013. There were two predominant sources of funding for this new capacity. Two-thirds of the capacity was built with purchased power agreements for the sale of the power (64 percent of agreements were with a utility and 2 percent with an end-use customer or non-utility retail supplier). Another 31.6 percent was constructed under ownership by the utility (29.6 percent) or customer (2 percent). Just 2.4 percent was built solely for sale into an RTO market.

The vast majority of the 2.4 percent of the capacity built only for market sales received some type of external funding. Only 0.1 percent of the new capacity was constructed for sale solely into the markets without any financial assistance.

Natural gas and solar were the predominant technologies for new capacity. Natural gas builds were characterized by a smaller number of larger projects, primarily constructed under utility ownership, while the solar installations consisted of numerous smaller projects that are more likely to be supported by utility or individual customer purchased power agreements.

The new capacity built in the RTOs with mandatory capacity markets represents only 6 percent of the total capacity, yet just over one-fourth of the nation’s electricity customers reside in the states in those RTOs — PJM, ISO NE and the NY ISO. Moreover, about one-fourth of the expected coal-plant retirements over the next three years are projected to be in the PJM footprint. ISO NE is also facing significant baseload plant retirements.

The APPA study underscores the central flaw in the mandatory capacity markets — that they do not support the stable long-term financial arrangements required to build new power plants. As the electricity industry faces new challenges from environmental regulations, baseload retirements, and an increased reliance on natural gas, it is crucial that the RTOs and the Federal Energy Regulatory Commission (FERC) revisit the mandatory capacity markets paradigm.

It is time to think outside the capacity markets box and support approaches to resource development that incorporate long-term planning, bilateral contracting, utility ownership, and demand-side approaches without the impediments posed by the complex “market” rules.

APPA continues to advocate that FERC mandate a transition from mandatory capacity markets to voluntary residual markets, where states and local public power and cooperative utilities will be able to procure the capacity they need through bilateral contracts. This would allow states and utilities to determine the optimal mix of resources and to structure their portfolios to lower costs, maximize reliability and be good environmental stewards.

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