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Moving the Market Design Discussion
Beyond Capacity Markets


Meg Gottstein, Principal, Regulatory Assistance Project
International Conference on the European Energy Market
Florence, May 10-12, 2012
This presentation includes material from a paper copyrighted 2012 IEEE under the title Beyond Capacity Markets-
Delivering Capability Resources to Europes Decarbonised Power System
Permission to use copyrighted information must be obtained directly from IEEE.
The Regulatory Assistance Project ("RAP")

RAP is a global NGO providing technical and policy assistance to government
officials and agency staff on energy and environmental issues. RAP Principals and
senior staff are all former regulators, government officials or senior policy advisors,
and RAPs work is funded exclusively by foundations and government agencies.
RAP has worked in more than 20 nations and 50 provinces and states. RAP's
European offices are headquartered in Brussels, with a second office in Berlin.

Meg Gottstein is a Principal with RAP working on European Programmes out of
RAP's Berlin office.
Prior to coming to RAP in 2008, Ms. Gottstein served for over 20 years as a senior
regulatory judge for the Commission overseeing California's electric and gas
industry. She has also held positions with the California Energy Commission and
the US Department of Energy, and provided consultancy services to the National
Governors Association and other organisations. She has a BA in Economics and
German from Tufts University, including two years of study at the University of
Tbingen, Germany. Meg received her Masters in Public Policy from Harvard
University and is also an Honorary Fellow at the University of Exeter, UK.
Recent RAP assignments include work with: UK Department of Energy and Climate
Change, European Climate Foundation (Policy Volume II, Roadmap 2050 and
Power Perspectives 2030), Council of European Energy Regulators, Sustainable
Development Task Force, and Chilean Ministry of Energy.
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www.raponline.org
Does Power Sector Decarbonisation Turn Traditional
Wisdom about ensuring Reliability on its head?
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YES!
But not in the way it is currently being discussed!
strategic reserve of capacity?
full-market capacity auction?
capacity auction with reliability option contracts?
Can energy-only markets secure system reliability?
DO we need something else?

WE NEED TO THINK BEYOND CAPACITY MARKETS
Whats the Answer?

Whats the Question?

Lets Start With:
What Does a Reliable Power
System Require?
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Electrons in Electrons out
Continuous Balance
of Supply and Demand
All Power Systems Require
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If you primarily have Dispatchable, Increasing
Marginal Cost Generation in the mix.
nuclear
lignite coal
hard coal
gas combined-cycle
gas open-cycle
oil
or merit order
m
a
r
g
i
n
a
l

c
o
s
t

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Total Demand
Western Denmark systemwinter demand patterns
Source: Security of Supply from a UCTE Perspective, Paul-Frederik Bach, April 2004
5/14/2012 7
Peak
Mid-
Baseload
Reliability Challenge:
Do you have enough firm capacity (# of MWs) to cover
the few hours of highest (peak) demand?
ALL CAPACITY PAYMENT designs (in theory or
practice) focus on a single reliability dimension:
Pay to ensure there is enough MWs of firm
capacity during the system peak demand
Baseload, mid-merit and peaking
generation each has an equal role/value
New investment in peakers is key focus--
quickest/cheapest to build MWs that can
economically operate just a few hours a year

This approach will not ensure reliability for
Europes decarbonised power system
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To Ensure Reliability of Europes Future
Decarbonised Power System:
Net or Residual Demand becomes a
critical reliability dimension

Net Demand = Total Demand
minus energy available from
variable renewables (e.g., solar, wind)*
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*Variable renewables are those whose output is not controllable (except through
curtailment) due to the nature of their primary energy source
Western Denmark system with 18% of energy from wind

The reliability challenge is rapidly shifting to one
of following frequent changes in net demand
Source: Security of Supply from a UCTE Perspective, Paul-Frederik Bach, April 2004
5/14/2012 10

KEY MESSAGE OF PAPER:

Market Design for a reliable,
decarbonised power system

Must address NET DEMAND
and deliver the RESOURCE
CAPABILITIES to meet it!
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Modelled for the power system operated by the WestConnect group of utilities in Arizona, Colorado, Nevada, New Mexico and Wyoming.
Source: Western Interconnection Wind and Solar Integration Study, December 2010, (NREL/TP-5500-50057) http://www.nrel.gov/docs;
Net demand: more volatile than overall demand, lacking a repeatable
pattern. Demand and availability of variable renewables can
be moving in opposite directions, any day, every day, several times a day
A Challenging Week for WestConnect (US), assuming 35% Wind Penetration
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Source: Deutsche Umwelthilfe, Background Paper--Extension of operating time for atomic power stations: Federal government
propels society into new fundamental conflict. (2011)
Net Demand Projected for Germany, 24
th
calendar week in 2020
Demand flexing in both directions will be
needed in the future, not just peak shaving
5/14/2012
Paying for MW capacity that is inflexible,
or not flexible enough will increasingly:
threaten system reliability

impose more costs on consumers

pressure to curtail/restrict renewables
needed to decarbonise the power system

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All full-market Capacity Auctions* developed to date
(in theory or practice) suffer from this Fatal Flaw
*e.g., forward capacity markets (PJM, ISO-NE model)
or capacity auctions with reliability option contracts (Colombia)
The Market-Wide Capacity Auction (3 years Forward)
R
1
R
5
R
3
R
6
R
7
R
4
R
1

R
2
R
3
R
4
R
5
R
1
-R
7
= Capacity offered by Supply-Side (New built, Existing, Uprates) and Demand-Side (Energy Efficiency, Demand Response, Distrib. Gen);
Self-supply (R
1
) bids in a zero price; New Resources set clearing price
R
6
R
7
Supply = Capacity
Committed Forward
Demand = System Operator
Forecast of Total Peak MWs
Quantity = MW
Bid Price =
$ per MW-day
P*
P* clearing price
paid to all capacity
clearing auction
Cleared Capacity = 100,000 MW
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R
2
15
Source: Market Monitoring Analytics (PJM)
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Cumulative PJ M Capacity Revenues
($42 billion over 6 annual auctions)
Demand Resources
2.43%
Energy Efficiency Resources
0.07%
Coal (Existing)
30.01%
Coal (Planned)
0.16%
Gas (Existing)
31.83%
Gas (Planned)
0.66%
Hydro (Existing)
4.91%
Hydro (Planned)
0.00%
Nuclear (Existing)
21.06%
Nuclear (Planned)
0.00%
Oil (Existing)
8.14%
Oil (Planned)
0.00%
Other Renewables (Existing)
0.68%
Other Renewables (Planned)
0.05%
Coal--Existing
Gas--Existing
Hydro-Existing
Nuclear-Existing
Oil-Existing
Energy Efficiency
70% to existing fossil-
fueled plants;
20% to legacy nuclear;
Where are the new gas,
flexible peakers?
Demand Response
Renewables-Existing
Renewables-Planned
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What Resource Capabilities are required to Operate
the System from a Net Demand Perspective?

Generators that can respond to rapidly changing
net demand, e.g.:
generators with frequent stop-start capability (daily)
fast and far ramping, minimum run times
Responsive demand (in both directions) has a much
larger role to play, along with storage technologies
Experience in real markets shows that demand-side can
and has provided this flexibility reliably, and much
cheaper than supply-side alternatives (see extra
slides)
Enabling grid development and cross-border balancing
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-
5.000
10.000
15.000
20.000
25.000
30.000
1 1001 2001 3001 4001 5001 6001 7001 8001
UK_South
How Flexible? Profile of mid-merit CCGTs in 2030
Source data compiled by RAP Europe in consultation with KEMA for four representative centers of gravity reflected in the model runs for
Power Perspectives 2030, European Climate Foundation, full report available at:
http://www.roadmap2050.eu/attachments/files/PowerPerspectives2030_FullReport.pdf

Example of large combined-cycle gas turbine fleet with typical average load factor (58%)*
( ~ 50% renewables in the mix, including hydro)
But requiring 264 start-stops per year of those mid-merit generators
Compared to < 50 typical start-stops for those plants today
*load factor = amount of plant output relative to maximum output it could produce
M
e
g
a
w
a
t
t
s

Hours in the year
5/14/2012
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Demand-response aggregator= Virtual powerplant
(not only demand reductionboth directions of response needed!)
ISO = system operator/TSO
Demand Response Virtual Powerplant offers
flexible capabilities to the system
Representative Simulation (US Aggregator = Enbala)*


*Slide graphics/animation reproduced with permission of Ron Dizy, President and CEO, Enbala Power Networks; available at:
http://www.enbala.com/gridbalancedemo.html

Response of all
resources =
Regulation
capability delivered
Signal sent by
system operator
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ENBALA Power
Network Client
Pool beginning
to respond to
ISO signal.
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The aggregate
response of each
resource in the
network is compiled
to form a unified
regulation
response.

5/14/2012 36
KEY MESSAGE OF PAPER:
The Proposed Market Design

Must Address NET DEMAND
and Deliver the Resource
CAPABILITIES to Meet it!
37
Key Design Check List for Evaluation:
Does the Market Design Proposal ?
1) Deliver capabilities required to meet net demand?
Does the proposal even assess net demand at all?
2) Make the most of existing resources with the required
capabilities, before turning to more expensive new ones?
3) Secure services from all potential resources, in particular
demand-side?
4) Ensure that resources without the necessary range of
capabilities (e.g., inflexible generation) are not
remunerated (or much less than those that can)?
5) Recognise the carbon content of resources delivering
capabilities?
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Does the Market Design Proposal (cont.)?
6) Avoid adverse impact on renewable investments that
can undermine Europes ability to meet its carbon reduction
targets?
7) Promote future cost reductions and innovation, avoid
foreclosure of market to future providers of flexible capabilities
(including consumers)?
8) Create a potentially scalable design, including future
integration of neighboring balancing areas and sharing of
capability resources?
Positive response to these questions suggests robust
proposal whilst any negative responses should raise
significant concerns
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You cant solve a problem with the same
thinking that created it.

- Albert Einstein

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You cant solve a problem with the same
market rules that created it.

- Meg Gottstein

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About RAP
The Regulatory Assistance Project (RAP) is a global, non-profit team
of experts that focuses on the long-term economic and environmental
sustainability of the power and natural gas sectors. RAP has deep
expertise in regulatory and market policies that:

Promote economic efficiency
Protect the environment
Ensure system reliability
Allocate system benefits fairly among all consumers

Learn more about RAP at www.raponline.org
Meg Gottstein, Principal; mgottstein@raponline.org