A path for FERC to settle tensions in Capacity Markets; look to NAESB OASIS as the model

ISO New England, in its filing to allow State sponsored resources access to capacity markets identified an issue in which energy consumers “pay twice” for capacity when States sponsor generating resources outside of wholesale capacity markets, stating:

“Another concern, ISO-NE states, is that the MOPR may cause consumers to “pay twice” for the same capacity—i.e., pay once for capacity procured in the FCM to serve their demand, and pay a second time for the additional capacity obtained through out-of-market contracts with state-supported resources.”

A proposal under development for potential standardization by NAESB, called the “Always on Capacity Exchange” eliminates this pay twice issue by improving the way capacity is secured, using a market based mechanism.

AOCE uses a bid/ask market mechanism in which capacity/energy buyers submit their bids to secure future capacity, by specifying the type of resource they wish to acquire future energy from. An AOCE bid contains requirements such as fuel type (Solar/Wind), emissions outputs allowed, pollutants allowed and the location where the future energy must be delivered to, along with other bid parameters. This would enable Green energy buyers, Investors and traders the opportunity to secure the type of energy they desire from owners of resources that match the buyers bid requirements by placing offers which culminate in a “Capacity Commitment” between bid/offer - buyer/seller.

Two critical success factors make AOCE a solution to the “pay twice” problem:

1. Capacity Commitment Owners (buyers in the transaction) are incented to acquire capacity in AOCE by receiving the full value of their capacity commitment investment plus an uplift, i.e. 10% for taking on this risk, called the capacity payment. This payment is issued when an ISO issues a Capacity Supply Obligation (CSO) to the offering resources in a capacity commitment agreement when securing capacity to meet State energy targets as a top priority in AOCE.
2. States no longer need to issue RFP’s to secure green resources, AOCE is the place for bids/offers to clear. However, States must send clear signals to the AOCE market of their energy targets, which dictates the priority order that an ISO must issue CSO’s, resulting in capacity payments being made to capacity commitment owners (investors/buyers), which includes the uplift (profit) guarantee. States do not need to pay for capacity resources using RFP’s, as they do today, they only need to tell the AOCE market what those energy targets are, setting priority status for those commitments that are sure to receive a CSO from the ISO, resulting in payments to the capacity commitment owners.

FERC is being called upon to find a solution to the capacity markets crisis that is occurring across Wholesale Capacity Markets today. FERC staff may wish to consider past successes to managing Transmission Capacity, a NAESB standard known as OASIS, which has successfully and quietly served the Energy Community for over the past 10 years. FERC may wish to consider the success of the OASIS regulation, which was created from the NAESB standards development process, when looking for a forum to produce an industry solution for Capacity Markets. It’s tough to argue against success.