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1) Demand Resources Get Capacity Revenue
2) Lack of Need for New Coal
3) Distributed Generation Procurement
4) Value of Hydro Doubles
5) No Panacea in LMP Markets

Demand Resources Get Capacity Revenue in New England
February 15th was an historic day for the role of demand resources (including energy efficiency, load management, and distributed generation) in capacity markets. Following two years of persistent efforts to equate demand resources with supply resources, ISO New England filed the rules needed to implement the new Forward Capacity Market (FCM) with FERC. These groundbreaking FCM rules provide an opportunity for a wide variety of demand resources to participate in the Forward Capacity Auctions, set the clearing price when appropriate, and receive monthly payments.

This expanded treatment of demand resources as equivalent to supply resources is unique in US wholesale electricity markets and represents the efforts of a broad cross-section of New England stakeholders, including regulatory commissions, energy service providers, consumer advocate offices, and environmental organizations. For ten months, Synapse represented numerous stakeholders in working group and committee proceedings to develop the overall rules and, in particular, design the specific rules for demand resources. We represented stakeholders from both the Alternative Resources sector and the End Use sector in the committee proceedings and provided analyses and coordination for the overall treatment of demand resources.

The FCM is a three-year forward market for capacity with its first auction scheduled for February 2008 for the 2010-2011 power year. A three year transition period will provide capacity payments to qualifying resources (including demand resources) for the 2007-2008, 2008-2009, and 2009-2010 power years.

In January a second round of hearings on Duke Energy Carolinas' Cliffside Project - a proposal for 1600 MW of new pulverized coal - was held in Raleigh. Synapse consultants David Schlissel and Anna Sommer testified that the Company's plan would significantly increase CO2 emissions despite the commitments of CEO James Rogers to take action on greenhouse gas emissions. The plan ignores a recent energy efficiency potential study that demonstrates that a 1600 MW coal plant could be replaced by energy efficiency. Additionally, the Company's modeling did not support the addition of 1600 MW of new coal.

In a decision issued on February 28, the North Carolina Utilities Commission approved the construction of only one of the two proposed 800-MW coal-fired units, conditioned upon Duke retiring four aging, 100-MW units at the existing site, investing one percent of its annual retail electric revenue into demand-side management programs, and retiring additional coal units on a MW-per-MW basis. The commission noted that Duke failed to demonstrate need for both units.

Duke stated that it will conduct a further review of the project prior to proceeding with its plans to install the single unit.
[ Download Testimony ]

Evaluation of Distributed Generation Procurement Methods

Synapse collaborated with the Pace Energy Project to evaluate New York State's Distributed Generation (DG) Pilot Program. The pilot project was conducted from 2002 to 2004. Through this procedure, New York utilities put selected distribution system projects out to bid among DG developers to determine whether DG could provide the service at a lower cost than the project proposed by the utility. Of the DG bids offered, none were selected as the least-cost alternative to distribution projects.

In the fall of 2004, NYSERDA hired Pace and Synapse to evaluate the results of the three-year pilot program, assess the program's effectiveness in meeting pilot program objectives, and to identify and evaluate alternative approaches for procuring DG as a distribution system resource. Pace and Synapse made recommendations to improve the DG procurement process based on our independent assessment of the DG Pilot experience, as well as based on a review of similar efforts to integrate DG in transmission and distribution system planning across the United States.
[ Download Report ]

Hydro Values Swell to New Levels
As projected power prices have climbed over the past few years, the value of carbon-free hydroelectric generating resources has increased dramatically. This is because these plants get the benefit of higher electricity prices but pay none of the higher fuel and emissions costs. Facilities which had declined in value during the early years of deregulation can be now have a market value of two or three times what it would have been just three or four years ago.

Synapse has worked with a number of cities and towns in New England that depend on property taxes from these profitable resources to make sure their tax valuations are fair and up-to-date. For example, we recently assisted the town of Rockingham, Vermont reach a settlement with TransCanada over the value of the Bellows Falls hydroelectric facility. Although an updated valuation was not part of the final settlement, the parties agreed upon annual payments to Rockingham that are consistent with Synapse' determination of the fair market value of the facility. This settlement means that the owner will be taxed fairly and that the town will receive adequate and predictable tax revenues for several years into the future.

For information on our generating plant valuation expertise and services, please contact Ezra Hausman at 617-661-3248 x242 or ehausman@synapse-energy.com.

Locational Marginal Pricing (LMP): Theory versus Practice

To address the effectiveness of LMP markets, Synapse was asked by the American Public Power Association to review the theory and goals of the LMP construct and to hold them up to the several years' worth of experience in LMP markets. In our investigation, we asked the following questions:


	- Does security-constrained dispatch and LMP pricing work as well in the real world as it should in theory?

	- Have the price-signaling aspects of LMP produced the desired outcomes in terms of investments in electricity infrastructure?

	- Have the LMP markets been workably competitive, or is market power and price manipulation a concern?

	- Have power production costs come down as a result?

LMP was designed to produce optimal, security-constrained dispatch in cost-based, regulated electricity markets. While it has proven useful in bid-based, deregulated markets, it is not sufficient to guarantee optimal market operations, efficient investment in infrastructure, competitive conditions or cost savings for consumers. There remains a crucial administrative role for independent system operators (ISOs) and market monitors to ensure that these objectives are addressed in today's LMP markets.

We found that whatever production cost savings may have occurred as a result of LMP-driven efficiencies, this benefit has largely not been realized by consumers. This is partly due to recent increases in fuel costs, but a more significant factor is the trend toward short-term contracting for electricity in a wholesale market in which power is priced at the margin. Long-term contracts can be useful to protect consumers, but the trend since deregulation has gone in the other direction. Reliance on markets and short-term contracts is not sufficient to produce just and reasonable prices for consumers.

In terms of investment signals, we find that LMP has simply not been successful in providing the necessary incentives for investment in generation, transmission, or demand response where and when needed (see figure), nor does it ensure the high levels of reliability demanded by consumers. We conclude that LMP price signals are overwhelmed by other factors in these areas, such as structural barriers to entry, competing economic incentives, and the lack of a clear mechanism for assuring return on investment in certain types of projects. We remain skeptical, however, that adding another layer of weak but expensive price signals in the form of locational capacity markets will do much more to solve this problem.

LMP appears to be a useful, perhaps necessary but certainly not sufficient component of deregulated, competitive electricity markets. Effective market designs must include both market-based and administrative elements, to ensure that public goods such as electric reliability and efficient transmission investments are provided even when not produced by market forces. Regulatory intervention has been and will continue to be crucial for rectifying the shortcomings of LMP in these areas. Attempts to rely on market solutions where regulatory ones are more appropriate leads to socially inefficient investments and to higher prices for consumers. [ Download Report ]

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