The evolution of capacity markets in the USA

The primary goals for moving from a regulated electric supply industry to a deregulated market were to reduce the average costs paid by customers and to promote efficient long-term investment. However, it is still highly debatable whether either of these goals has been realized in the northeastern states. Regulators have rejected the rationale for long-run competitive prices in an energy-only market, and instead, they have adopted short-run competitive prices as the criterion for judging the performance of a spot market. Although they have been reasonably successful in maintaining this strategy, by doing so, they have introduced the problem of ldquomissing moneyrdquo for generators. As a result, the northeastern states have adopted or proposed some form of installed capacity market (ICAP) to provide generators with additional income to cover the missing money. Although most regulators agree that generators need some supplementary income, there is no general agreement about how this extra income should be provided. The objective of this paper is to discuss and evaluate how and why the designs of an ICAP market have evolved from New York to PJM to New England. In this paper, we explained 1) why investors have been reluctant to build new generating capacity in New York, and 2) the rationale for the alternative designs proposed in PJM and New England. Finally, we presented the results of economic experiments that conducted in February 2007 and October 2007 by the Power System Engineering Research Center (PSERC) at Cornell University to test the performance of a simplified Forward Capacity Market (FCM) proposed for New England.