The Brattle Group Conducts Review of Capacity Market for the Midwest ISO: Identifies Successes and Recommends Refinements

CAMBRIDGE, Mass., Jan. 20 /PRNewswire/ -- A report released today by the Midwest Independent Transmission System Operator (Midwest ISO) and prepared by consultants at The Brattle Group provides the first independent assessment of the Midwest ISO's new resource adequacy construct, identifying several major successes and a series of recommendations for further improvement.

The major successes identified include, first and foremost, the Midwest ISO's effective implementation of a comprehensive resource adequacy (RA) construct, with four major components: an RA requirement imposed on load-serving entities (LSEs) with financial enforcement provisions; resource qualification and performance requirements that accommodate all resource types, including demand-side resources; a standardized capacity product called "Planning Resource Credits" to support liquidity in trading; and a voluntary capacity auction for settling imbalances just before each delivery month.  Second, the premier planning year under this construct has proceeded smoothly, although this might be attributed in part to the existing excess supply conditions.  Third, the Midwest ISO has implemented an industry-leading scarcity pricing mechanism that will help support resource adequacy through energy and ancillary markets when market conditions become tight.

The report identifies several opportunities for improvement, including:

1. Locational resource adequacy: The Midwest ISO's current design will rely partly on out-of-market mechanisms for locational resource adequacy in transmission-constrained zones.  To improve the design, the Midwest ISO should consider implementing local sourcing requirements.  
2. Load forecasting: The current use of load-serving entities' non-coincident peak load forecasts to set resource adequacy requirements may create incentive problems and accounting gaps.  The Midwest ISO should consider developing its own coincident peak load forecasting capability.
3. Load tracking: Load migration in retail choice states is not tracked, so migrating customers may temporarily not be included in any LSE's resource adequacy requirement.  The problem could be resolved by developing a tracking and settlement system that accounts for load migration in a timely manner.  
4. The reliability target: The "1 day in 10 years" loss of load expectation reliability standard, which is used as the basis for setting resource adequacy requirements, has not been sufficiently evaluated for economic efficiency.  If the target is not economically efficient, it could lead to costly over-investment or under-investment in capacity resources. The Midwest ISO should consider conducting an assessment of an efficiency standard, and work with the North American Electric Reliability Council (NERC) regional entities to revise the current standard if necessary.
5. Investment/retirement monitoring: It will be important to monitor capacity investments and retirements over time, particularly in retail choice states, to ensure that the next round of capital investments will be made when and where needed.      

Stakeholders are divided about the long-term vision for the resource adequacy construct, with some stakeholders proposing that the Midwest ISO should adopt a mandatory forward capacity market, while others favor moving to an energy-only market.  However, this report recommends postponing consideration of such a fundamental market redesign.  Rather, in order to maximize economic efficiency and the performance of its capacity, energy, and ancillary services markets, the Midwest ISO should focus on refining the current RA construct while making the demand-side more price-responsive.  Ultimately, greater demand participation can enable increased reliance on market signals without going to a pure energy-only market that eliminates the reliability standards that non-curtailable load desire.

The report, "Midwest ISO's Resource Adequacy Construct: An Evaluation of Market Design Elements," was authored by Brattle consultants Samuel Newell, Kathleen Spees, and Attila Hajos, and is available for download at www.brattle.com.  The report incorporates extensive stakeholder input and review, which the authors gathered through focus group meetings with each of the nine stakeholder sector groups, written comments, and presentations to the Midwest ISO's Supply Adequacy Working Group.

The Midwest ISO ensures reliable operation of, and equal access to, high-voltage power lines in 13 U.S. states and the Canadian province of Manitoba.  The Midwest ISO manages one of the world's largest energy markets, clearing nearly $41 billion in energy transactions annually.  It was approved as the nation's first regional transmission organization (RTO) in 2001.  The non-profit 501(C)(4) organization is governed by an independent board of directors, and is headquartered in Carmel, Indiana, with operations centers in Carmel and St. Paul, Minnesota.  Membership in the organization is voluntary.  Visit www.midwestmarket.org for more information.

The Brattle Group provides consulting services and expert testimony in economics and finance to corporations, law firms, and public agencies worldwide.  Areas of expertise include antitrust and competition, valuation and damages, utility regulatory policy and ratemaking, and regulation and planning in network industries.  For more information, please visit www.brattle.com.

SOURCE The Brattle Group