News Analysis

 

New England puts a price on electric reliability, but some say the charge looks more like a tax.

Does ICAP qualify as a true commercial product, traded on its own merit with a tangible value for customers?

Or does it exist as artifice - a fiction contrived by regulators to revive and monetize the traditional duty to serve, itself an idea that may have lived past its time?

ICAP denotes "installed capability" - not the electric energy that users consume, but the capacity to produce it. ICAP represents the right to receive power that utilities (also called "load-serving entities," or LSEs) must buy from generators to make sure they have enough supply to cover the demands of their customers, including a margin to allow for contingencies.

Regulators want to make a market in ICAP. They say ICAP offers an essential incentive for power producers to build new plants, since without it, generators could never recover their fixed costs. To create that incentive, regulators impose an ICAP deficiency charge, based on some administrative estimate of the value of installed generating capacity, and payable if your ICAP runs short. Utilities never buy ICAP, the theory goes, if they find it cheaper to go without and pay the penalty. So most everyone concedes that the deficiency charge will set the price of ICAP traded in a bilateral market. Yet the regulators are having trouble setting the deficiency charge, and hence setting the price.