In his dissent to a Nov. 19, 2020, Federal Energy Regulatory Commission Order on Rehearing related to ISO New England's Competitive Auctions with Sponsored Policy Resources (CASPR) construct (Docket ER18-619-001), Chairman Richard Glick questions the need for a Minimum Offer Price Rule (MOPR) and whether the concept of "investor confidence" should be a "lodestar" that matters in FERC's decision-making. Regardless of how the debate on any particular market mechanism plays out, it is of course true that investors countenance investments based on the expectation that they can recover their capital (including an adequate return). The key market design question is whether investors or ratepayers should bear the risk that the investment choices were sound.

Investors are willing to commit significant at-risk capital when they are confident in market rules. Well over $100 billion of private capital has flowed into Texas, PJM and New England over the last decade, resulting in more than 70 GW of new capacity. This at-risk investment has served the dual pursuits of reliability and low cost — and is exactly what the MOPR rules were designed to protect.

Competitive markets have proven their effectiveness in meeting cost and reliability goals, but some states are now eager to include additional attributes — such as environmental performance or economic development — in their preferred resource selection criteria. State regulators have become impatient with the often painstakingly slow process of revising RTO tariffs, and legislators are eager to make their mark — pursuing policy goals via direct procurement of renewable resources. The current trend is toward low- or zero-risk investment opportunities, primarily through state-mandated contracts, which shifts the risk of the investment decision from investors to ratepayers.

Layering a command-and-control approach on top of existing market structures erodes investors' confidence in deploying at-risk capital. Consequently, if capital will not flow freely because of a lack of "investor confidence," someone will have to specifically decide what new resources are selected, the manner in which they are compensated (e.g., long-term contracts or traditional cost-of-service), and how to compensate existing assets that are needed for reliability. 

Maintaining the integrity of the competitive wholesale markets should remain a primary goal of public policy, and states generally say they do not want to return to central planning and procurement. Nonetheless, they also don't want consumers to bear the full cost of public policy resources in addition to having to pay for the otherwise required amount of capacity from the market. As the Biden administration policies are implemented and a reshaped FERC begins its work, we believe it is likely that the new Commission will re-examine the structure of the current MOPR mechanisms in an attempt to resolve this. 

In which case, policymakers will ultimately face a fundamental choice:

Do we move to a world dominated by central procurement, with guaranteed returns to asset owners and 100% ratepayer risk? Or do we continue to rely on market policies that entice investors to deploy capital at their own risk?

Answering these questions is becoming more urgent. Numerous analyses, such as the recently published "Massachusetts 2050 Decarbonization Roadmap," highlight the indisputable fact that timely and meaningful decarbonization has to include "deep electrification" in the transportation and buildings sectors. This will inevitably drive enormous growth in electric demand and require an unprecedented investment in new generation and transmission.

At the same time, we also will need to retain and even expand existing firm resource capacity to maintain reliability. As we have seen recently in California, for instance, market signals were weakened by state-mandated procurement, investors backed away from deploying at-risk capital to maintain existing assets, and numerous plants retired, resulting in unfortunate reliability outcomes.   

The challenge is how we will compensate necessary resources, recognizing that their traditional energy market revenues will be displaced over time by zero-marginal-cost renewables. We don't believe that blowing up markets to go back to central planning should be anyone's goal. But how can competitive wholesale markets co-exist with state mandated, out-of-market procurement that undermines price signals and investor hopes of fair compensation?

We firmly believe that an economy-wide carbon price, paired with truly competitive power markets, is the right way to deliver the necessary combination of cost-effective electric reliability and decarbonization. We remain optimistic over the medium term that this is possible — while we certainly recognize that more command-and-control decision-making will likely be a major feature in the ongoing evolution of electric markets.

During a period of such dramatic change in our industry, can we achieve a balance that preserves the benefits of markets in light of the growth in state-mandated "public policy" procurement? We think we can — that it might be possible to avoid full-on central planning. It will have to be a path where states have a real say in their resource choices, but, just as importantly, market policies ensure non-discriminatory compensation to assets needed to support reliability. And this must be accomplished through a durable enough market mechanism that provides "investor confidence" for companies, like Calpine, that are ready to deploy capital at our own risk where we view the market landscape as providing us a chance to earn a fair return.