This paper discusses issues hybrid and co-located resources are likely to face in wholesale electricity markets in the United States related to market power mitigation.
Specifically, the paper considers whether changes are needed to market power mitigation provisions to ensure that hybrid and co-located resources are treated in a non-discriminatory manner and not inefficiently over-mitigated. Section 2 of the paper provides an overview of market power mitigation in wholesale electricity markets, which are operated by independent system operators and regional transmission organizations (ISOs). Section 3 discusses the economic incentives that hybrid and co-located resources are likely to have in ISO markets given the revenue streams such resources are eligible to earn outside of ISO markets, principally through long-term power purchase agreements or through the sale of renewable energy credits (RECs). Section 4 explains that the methods ISOs currently use to develop competitive offers for hybrid and co-located resources may not be appropriate for hybrid and co-located resources because they are designed for other resource types. Section 4 also explains that existing rules regarding physical withholding may need to be revised when applied to hybrid and co-located resources given their unique operating characteristics. Finally, section 5 of the paper presents possible solutions to revise ISO market power mitigation rules to better reflect the economic incentives and optimal operation of hybrid and co-located resources.
Developing such solutions will involve the ISO working with hybrid and co-located resource owners to adapt market power mitigation rules related to reference levels, physical withholding, and other provisions in a manner that mitigates market power and also appropriately reflects the incentives, short-run marginal costs, and optimal operation of such resources.