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2005-01-19
Market Based Electricity Solutions Could Save U.S. Consumers $19 Billion Annually
New study recommends market-based mechanisms to minimize consumer costs of electric reliability and resource adequacy
For Immediate Release - January 19, 2005
Contact: Jamie Wimberly - (202) 483-4443
Washington, DC ... The Distributed Energy Financial Group (DEFG), a specialized financial services firm, and the Center for the Advancement of Energy Markets (CAEM), a non-profit energy policy think tank, released a 80-page study today entitled “Resource Adequacy and the Cost of Reliability: The Impact of Alternative Policy Approaches on Customers and Electric Market Participants.”
Many regions of the United States have enacted or are considering the imposition of “generating reserve” or “resource adequacy” requirements to ensure higher electric reliability levels. The study concludes that this regulatory approach: 1) Results in considerable costs passed onto consumers over and beyond the current costs; 2) Treats all consumers the same regardless of their preferences to pay for more or less reliability; 3) Undermines other public policy goals, e.g., the creation of competitive markets and the ability for consumers to respond to changes in electric prices; and 4) Disproportionately impacts market participants, providing subsidies to electric generators and potentially increasing costs to marketers and utilities that do not own generation.
“We conclude that both regulated and restructured electricity markets tend to maintain unnecessarily large reserve margins that impose net costs on customers,” stated Dr. Ronald Sutherland, one of the primary authors. “That is, the value of improved reliability due to reserve generating capacity is much less than the cost of providing this capacity.”
The study recommends that market-based approaches to improving reliability – including market-based demand response initiatives, distributed energy and moving towards an energy only market (with limited or no extra capacity costs fixed for reliability) – be adopted or phased in to more closely link consumer preferences and consumption levels with costs. Specific recommendations include:
- With regard to operational reliability, replace annual capacity obligations with a short-term capacity reserve margin, and match capacity reserves to expected peak generation plus a reserve margin, during a short planning period (months, not years). The expectation is that alternative, less costly means, e.g, energy efficiency, demand response and distributed energy, will develop to meet resource adequacy needs, at least in part, within shorter timeframes. Resource adequacy in the longer term will be come on line through market based pricing solutions that attract capital to build generation, transmission and distribution assets.
- Link the marginal cost and marginal value of reliability to customers; do not set a reserve margin by “rule of thumb.”
- Allow wholesale prices to float and to accurately reflect the marginal cost of supplying electricity.
- Eliminate barriers to developing a price-demand response market.
- If necessary, set larger capacity reserves during the transition to a competitive market (for example, when prices are capped) and reduce or eliminate the capacity reserve once the market is competitive and/ or the artificial caps have been removed.
“Economic efficiency and consumer benefits cannot be achieved if we attempt to build a competitive market on top of the foundation of an inefficient capacity market,” concluded Nat Treadway, the other principal author and a DEFG managing partner. “By relying more on market-based solutions, $19 billion in potential costs savings translates to putting back over $60 annually in every American’s pocket while maintaining high levels of electric reliability. That’s a goal worth pursuing.”
The entire study is available at no charge by contacting Jamie Wimberly, DEFG CEO and CAEM President.
DEFG and CAEM will be hosting a two hour web cast/ conference call on Tuesday, February 22nd, from 2 to 4 p.m. EST, to discuss the results of the study with interested stakeholders. Regulators, public officials and journalists can join the call at no charge. Other industry stakeholders will be charged $195 to participate on the call. To RSVP and receive the call instructions with a PowerPoint version of the presentation, contact Nat Treadway.
Distributed Energy Financial Group
Distributed Energy Financial Group, LLC (DEFG, http://www.defgllc.com/) is a specialized financial services firm providing consulting, advisory and capital placement services designed to link energy technology companies to the capital markets. DEFG excels at sector analysis, due diligence analysis, market research and regulatory analysis.
Center for the Advancement of Energy Markets
The Center for the Advancement of Energy Markets (CAEM, http://www.caem.org/) is a not-for-profit corporation founded in May 1999. The mission of CAEM is to chronicle and understand changes in domestic and global energy markets brought about by technological change and policy developments; expound a market-oriented vision for energy markets; develop consensus on mission-critical issues relating to the successful transition to more competitive energy markets; and persuade and encourage key public policy, consumer, and corporate decision makers to implement changes to achieve more competitive energy markets. The Center offers a variety of educational programs and publications which provide the major source of its funding. |
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