Monday, August 15, 2011

For Coal Plants, A Game Of Chicken

For Coal Plants, a Game of Chicken -

"In a research note released late Friday, Bloomberg New Energy Finance said that capacity payments in 2014 and 2015 would reach a level equal to $7 per megawatt-hour of electricity sold — in other words, about $7 on the monthly bill of that suburban house, or seven-tenths of a cent per kilowatt-hour. The national average retail price of a kilowatt-hour is about 10 cents, although in some parts of the Northeast it can be triple that amount.

Higher capacity payments are one of the mechanisms through which surviving electric plants will get the revenue needed for add-on antipollution devices.

Charles Blanchard, an analyst at Bloomberg New Energy Finance and author of the research note, said in an e-mail that capacity payments may reach 25 percent of total revenues as supply is reduced."

This article, from the New York Times, is very important to electricity markets, but my myopic Ontario outlook demands I note the 'capacity' market stateside is equivalent to the debt retirement charge we have in Ontario.

Interesting - and likely not a coincidence at all.


  1. Well, the DRC was implemented retroactively and is not a market-based solution (ie, it's just added to the bill every month at a sort-of arbitrary rate). It's not clear whether the DRC is going to fund "bad" hydro investments, below-market rates, or whatever else. PJM's market is very transparent, conducted before the fact, and payable per kW, not per kWh. In other words, there's competition in capacity markets, whereas there's no competition for who gets the DRC funding. -Charlie Blanchard

  2. Well, my comment is pretty dopey in hindsight.
    Thank you for your comment Charlie.
    Here is what I hope was the basis for that little blurb I wrote after quoting the NY Times article: an electricity system that can meet peak demand seem likely to pay, in some way, for capacity that is infrequently required. Markets that are required to take supply that is not expected to be present at peak demand (specifically wind in Ontario, and many other jurisdictions), are more likely to need to fund capacity through separate mechanisms. The market struck me as a great idea (I had been looking into NordPool's strategic reserve concept before seeing this).
    The DRC is a poor comparison, but I meant all systems probably have some pieces that would be seen as overvalued if capacity requirement, for peak demand, was not part of the evaluation. The net revenue requirements that are part of more recent CCGT contracts are likely a better example of the capacity costs that crept into Ontario.
    I wrote some quick hits on economic themes I hope better minds, with better resources, communicate more successfully: