Commissioner James Danly Statement
March 23, 2021
Docket No. AD21-10-000
Today’s conference is entitled “Modernizing Electricity Market Design: Resource Adequacy in the Evolving Electricity Sector.” As anyone familiar with FERC is well aware, today’s discussion will touch on some of the most complex, divisive and daunting challenges the Commission faces. One should always approach a subject this difficult by reminding oneself of the fundamentals, so I would like to take a moment and state the three basic principles by which our inquiry into market reform should be informed:
- we are charged by Congress with ensuring the reliability of the bulk power system;
- we are also charged by Congress to ensure that the wholesale prices established by our competitive markets are just and reasonable; and
- we must ensure that the costs of one state’s public policy decisions are not borne by the citizens of other states.
When we talk today about ensuring resource adequacy, what we are really talking about is how to keep the lights on as states increasingly implement public policies favoring intermittent generation. Doubtless the states have the ultimate say in determining the type of generation that is built and operated within their borders, but as the regulators responsible for ensuring that the lights do stay on, we cannot shy away from recognizing the profound challenges attendant to accommodating those state goals of integrating intermittent resources. I think it is critical that, from the outset, we as regulators take a clear-eyed view of what we are talking about.
And in grappling with this question, we also have to recognize that when we discuss resource adequacy, the question is whether our markets are procuring the right kinds of resources, in the right quantities, to ensure reliability. The capacity markets already procure more capacity than our RTOs have determined to be the minimum necessary to maintain reliability, as our written questions acknowledge. I think we need to squarely address whether the capacity that is being procured by the RTOs is composed of the right kinds of generation to maintain the system. And further, even if we have the right mix today, how can we ensure that we maintain it in the future?
In starting this discussion, we should recognize the current state of our electric system and the questions that must be asked if we want to ensure that our markets function and that we maintain reliability. Our panelists seem to be in general agreement that we are going to need significant conventional generation capacity to maintain reliability in at least the near and intermediate term. Of course, conventional resources have their own reliability issues, but they are reasonably well understood and accounted for under our existing regime. And I don’t mean to suggest that intermittent resources provide no capacity value at all and it is possible that they might be able to keep the lights on someday without the support of conventional resources. But today, when we ask what the right kinds of resources are, what we are really asking is how do we keep conventional, dispatchable resources in service in sufficient quantities for as long as they are needed to ensure reliability? This of course includes the further question of how we provide incentives for the construction of new resources, conventional and otherwise, that can provide the necessary reliability attributes as existing resources retire.
The short answer to how we achieve this is money. How do our markets, energy, ancillary services, and capacity combined, ensure that conventional generators earn adequate revenue to stay in operation while they are still required for reliability?
It will be a challenge. Energy prices are currently low, and they are likely to get lower as the number of intermittent resources grows. Those resources have few, if any, variable costs and are able to offer into the markets at very low prices, much lower than any conventional resource. The more energy these resources offer into the market, the lower our energy prices will get. Our written questions ask what can be done to address suppression of energy and ancillary services prices, and I am curious to hear what our panelists have to say on that question. Their written statements suggest that some revenues can be generated through enhanced scarcity pricing and the creation of new ancillary services that provide revenues to generators capable of providing flexible ramping products. I want to hear more on this subject because I do not see how these approaches could provide the sufficient additional revenue that would be required to retain these generators if the capacity market prices are suppressed. I hope I am wrong.
Whether or not I am wrong about energy and ancillary services prices, however, our panelists seem to agree that those revenues alone cannot sufficiently compensate conventional resources sufficiently to ensure that they are retained by the market. This means we must look to the capacity markets to provide the remaining revenues necessary to ensure an adequate quantity of capacity from conventional generators. That, of course, is one of the purposes of our past MOPR rulings. However, if, as many expect, the Commission eliminates or curtails the MOPR in the near future, capacity prices will plunge.
It is worth reiterating that we are obligated by the FPA to ensure just and reasonable rates. It is also worth reminding everyone of the history of FERC’s markets. The orders that allowed competitive markets to supplant traditional cost-based ratemaking were premised on our determination that the prices established by competitive market mechanisms are just and reasonable. If the capacity markets are subject to price suppression caused by the entry of subsidized intermittent resources resulting in uncompetitive prices, then the entire theory by which we justified the claim that our markets satisfy the FPA is undermined. Non-competitive markets cannot produce just and reasonable rates.
If we eliminate the MOPR and fail to replace it with something that provides conventional resources with the just and reasonable rates necessary to earn a satisfactory return on investment, those resources will retire. And the premature retirement of conventional resources that are still needed to keep the lights on will be disastrous for the electric system, for our economy, and for the well-being of the public.
But just because something is challenging does not mean that it cannot be done. A great deal of thought has already gone into these questions and we have many people who have spent years working on them here today. I am interested in hearing what they have to tell us. Hopefully they can give us ideas that will enable the Commission to meet the challenge.
Thank you to everyone participating today, I look forward to the discussion.