Download - COMPETE Market Principles
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8/13/2019 COMPETE Market Principles
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8/13/2019 COMPETE Market Principles
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Competitive electricity markets
continue to demonstrate their
substantial value to customers
through lower prices, increased efficiencies
and service innovations that allow customers
to more effectively manage their energy
portfolios. In competitive markets,
customers benefit from the flexibility tochoose from a variety of technologies,
products and services offered by competing
providers.
Market Principles
The success of retail electricity markets is inextricably linked to the efficacy of wholesale
markets, and vice versa. A broad regional wholesale market that provides a level playing
field for all resources as well as accurate, timely and transparent prices is essential for the
supply choices and innovative services that drive competition for retail customers. And
because retail providers shop in the wholesale market, the pressure on retail providers
to keep costs down and innovate further sharpens the need for the wholesale markets to
operate as efficiently as possible.
Despite the proven customer benefits of well-structured electricity markets, significant
policy challenges threaten their long-term sustainability. These challenges include
government subsidized and rate-based generation in competitive markets, preferential
treatment of some resources, non-bypassable retail charges to recover the generation-
related costs of certain resources, and resources procured without using a competitive
market process.
Based on the substantial value of electricity markets to customers, COMPETE will
continue to promote and defend competitive electricity markets and to vigorously
oppose policies that threaten the sustainability of existing markets. To provide clarity
and guidance to those endeavors, the following principles will be reflected in all of
COMPETEs positions and activities.
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Price Signals
Prices should reflect market fundamentals, accountfor the location of transmission network bottlenecks,
and be available to market participants as close to real
time as possible. Because of the unique characteristics
of electricity, market fundamentals can change
quickly. Accordingly, price signals are needed in
time for customers to react to them and have the
opportunity to make cost-saving adjustments. Seeing
price signals after consumption and other energy
portfolio decisions have been made, or having static
prices that are unresponsive to changes in the market,as is the case under traditional regulation, results in
inefficient usage decisions and higher energy bills for
customers.
Prices should perform certain basic functions: ensure
that the least costly generators are selected to operate,
signal how much generation is needed, provide
the tools to transparently manage price risks and
provide the basis upon which resource developers
can assess the value of investments based on marketfundamentals (supply, demand, fuel prices, etc.).
Distinct services should have distinct prices.
Electricity supply in wholesale markets is comprised
of a number of different services provided by
different generators with different operating and
cost characteristics. For example, some generators
are needed to follow the minute-to-minute variations
in demand on the system and thus must be able to
change output quickly. Pricing the various servicesseparately helps ensure that the most efficient
resources are used for each service, creating greater
reliability at the lowest possible price. End use
customers could elect to respond to prices by reducing
demand or installing on-site generation.
Electricity
markets must
have accurate
and transparentprice signals
to guide
investment and
consumption
decisions.
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Open Markets
There must be no arbitrary limits on which entities,resources or customers may participate in wholesale
or retail markets. Examples of arbitrary restrictions
are the percentage limitations imposed in some states
on how much load is subject to retail competition
(e.g., Michigan and California).
Preventing some customers from shopping for their
electricity suppliers while allowing others to shop
violates fundamental notions of fairness. Moreover,
it artificially limits the demand for service fromcompetitive suppliers, keeps investment in potentially
lowercost resources out of the market, and leads to
unnecessarily high prices.
Preventing some customers
from shopping for their
electricity suppliers while
allowing others to shop
violates fundamental
notions of fairness.
Competitive
markets must
be open to
all marketparticipants
without arbitrary
restrictions
on market
participation.
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Fair Rules& Practices
Market rules and practicesmust be non-discriminatory
so that all resources
participate on a level
playing field.
A variety of resourcescan provide the services
needed to keep supply
and demand in balance,
including traditionally-
fueled generators, renewable
intermittent generators,
storage facilities such as
batteries and flywheels, and demand response. These resources have different operatingcharacteristics that must be recognized by the market rules so that all have a fair chance
to compete.
A level playing field also requires basing the market rules and practices on the principle
of comparability: all resources must abide by the same rules, must meet the same
obligations, and must be compensated for a comparable service actually provided to the
grid. Otherwise, customers are forced to subsidize the choices of a resource.
Assuring a level playing field for all resources enables customer choice, and ensures
vibrant competition, innovation and the lowest available prices for customers.
Comparability:
All resources must abide by the same rules,must meet the same obligations, and must be
compensated for a comparable service actually
provided to the grid.
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Non-bypassable surcharges
are anti-competitive,
acting as a tax on shopping
customers by forcing them
to pay twice for generation
service if they choose a
competitive supplier.
Surchargesfor Generation
Non-bypassable charges that retail
customers are forced to pay must not be
used to recover the costs of generation and
other supply services.
Some states seek to recover the costs of certain generation facilities from all customers
through a non-bypassable surcharge on distribution wires service. These charges are
anti-competitive, acting as a tax on shopping customers by forcing them to pay twice for
generation service if they choose a competitive supplier. Such charges can also saddle
customers with risk of poor generation supply decisions and practices of others, over
which the customer has no control.
Eliminating anti-competitive non-bypassable charges ensures that electricity customers
pay for service based solely on voluntary contracts with competitive suppliers.
Customers that shop for their retail energy service bear the risks of that choice, and
should not be asked to pay for services or resources they did not choose (e.g., NJ LCAPPplants).
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Subsidized Resources
Subsidized
resources distort
the market and
harm customers,
and should not be
allowed to interferein competitive
markets.
Subsidies for supply resources can
occur through various means. One way
is when a state provides a guaranteed
revenue stream to a new generator that
is not available to competing existinggenerators. Another is by limiting
procurements to a specific type of
resource. Resources are subsidized to the
extent the price paid to them exceeds the
price that would have resulted from an
unrestricted market without government
intervention. Subsidies unfairly pick
winners and losers in the supply marketand lead to above-market solutions and
higher prices for customers.
Subsidies can give the short-term
illusion of reducing market prices by
adding new supply resources. However,
subsidies must be paid by customers (or
taxpayers) and, over time, can result in
non-subsidized competitors leaving the
market, taking with them the investment
and competitive discipline needed for a
well-functioning market.
COMPETE recognizes that subsidies
currently exist for energy technologies.
Where they exist, such subsidies should
be identified for consumers and there
should be a plan in place to reduce and
eliminate the subsidy within a reasonable
time.
There must be strong protections from
buyer-side market power, such as the
Minimum Offer Pricing Rules (MOPR)
in the organized regional wholesale
markets, like PJM, to protect customersfrom the negative impacts of price
subsidies.
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Competition
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CompetitiveProcurements
Utilities or states sometimes direct the procurement
of resources to meet forecasted demand. However,
eligible resources are sometimes restricted to new
resources, resources in certain locations, or resources
using certain technologies. Similar to subsidies, these
restrictions can unfairly pick winners and losers,
result in above-market solutions and uneconomic
entry. Customers ultimately pay higher prices fortheir electricity.
Requiring that competitive procurements consider all
qualifying resources achieves the greatest customer
benefit by ensuring that potentially lower-cost
resources that can perform the needed service are not
kept out of the market.
Requiring that competitive
procurements consider
all qualifying resources
achieves the greatestcustomer benefit.
Competitive
procurements
must be open
to all qualifyingresources, and
not restricted
to specific
technologies,
locations or
vintages.
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Market BasedResource Adequacy
To ensure long-term resource adequacy,
electricity markets must have clear and
transparent standards that rely on market-
based mechanisms, which can include a
capacity construct where needed.
Resource adequacy is the availability of an adequate supply of generation or demand
responsive resources to support safe and reliable operation of the grid. Resource
adequacy standards provide incentives for the siting of resources for future reliability
needs, mitigate price volatility, and help assure that load serving entities maintain
adequate resources.
Resource adequacy standards should be durable and not require modifications from year
to year.
Such standards should ensure sufficient incentives and meaningful obligations for all
resources, and all resources should have equivalent obligations.
Resource Adequacy:The availability of an adequate supply of
generation or demand responsive resources to
support safe and reliable operation of the grid.
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Competitive
Wholesale Markets
RTOs and ISOs operate and manage
the interstate electricity grid over large
regions, are independent of any market
participant, and dispatch their systems
by means of competitive auction-based
energy markets. Accordingly, theseorganized markets provide the fair,
transparent rules and the access to
grid services needed for a level playing
field, and produce prices that signal
the true cost of resources needed for a
wellfunctioning competitive market.
The organized markets are the best wayto assure an affordable, efficient and
adequate supply of electricity and to meet
environmental goals. They provide the
tools that foster efficient investment and
the products and services consumers
want, provide a level playing field for all
resources, foster renewable and demand
response resources, enable innovation,
attract infrastructure investment in the
right places, and reward efficiencies.
States that have restructured retail
electricity markets but are not within
the footprint of an RTO or ISO should
establish an independent entity
to perform the critical function of
scheduling generation and transmissionservices. Independence from market
participants is essential to ensure that
such important functions are performed
in a non-discriminatory manner that
ensures a level playing field.
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Competition
Independently administered organized
wholesale markets, such as those operated
by Regional Transmission Organizations
(RTOs) and Independent System Operators
(ISOs), are needed for competitiveelectricity markets.
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Effective independent
oversight provides theconfidence in results that
attracts transmission and
generation investment and
ensures customers of a
reliable supply of electricity
at the lowest available
costs.
IndependentOversight
Competitive markets must have clear and
transparent rules and effective independent
oversight to ensure compliance with the
rules and accountability to customers and
regulators.
The fair market rules needed for a level playing field and efficient operation mustbe enforced, and regularly evaluated. Effective independent oversight provides the
confidence in results that attracts transmission and generation investment and ensures
customers of a reliable supply of electricity at the lowest available costs. Accordingly,
appropriate sanctions must be imposed for violating rules to ensure that all participants
have confidence in the market. In addition, there should be periodic assessments of
market performance to ensure prices are accurate and the market is sustainable.
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Principles for Well-Functioning Competitive
Electricity Markets