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PJM's New Game

If transmission can substitute for gen-plant capacity, why not clear both products in the same auction?

Fortnightly Magazine - December 2005

resource adequacy, especially since FERC switched gears this fall regarding New England’s proposed locational capacity market, known as LICAP.

Moreover, by opening settlement talks in the LICAP case and inviting New England to consider all reasonable alternatives, FERC gave new hope to all sides in the PJM case as well. The result has thrown the ICAP/UCAP/LICAP debate wide open, encouraging theoretical discussions of all sorts.

For example, should a capacity construct include a market auction, or just a mandate for forward contracting? Should it include a locational aspect, if spot energy markets already provide for locational marginal pricing (LMP)? And what about energy markets: If price caps are removed, can the energy price alone, without any capacity market, create enough incentives to encourage adequate investment in generation?

Playing a key role in the debate is Harvard Professor William Hogan, often cited as the spiritual father of PJM’s energy spot market. Hogan had attracted considerable attention in September when he released an article suggesting an energy-only model, and attached it to comments filed by the California ISO in answer to an unrelated proposal to adopt a LICAP structure in California. (See “LICAP: A Mad Dash to the Finish,” November 2005)

To justify its RPM plan, PJM cited what it called “a dramatic spike” in power plant retirements—especially in New Jersey and the Mid-Atlantic, with many closures announced on no more than the required 90 days’ notice. These retirements had uncovered violations of reliability criteria for 2005 and each subsequent year through 2009, said PJM’s Steven Herling, vice president, planning, in a sworn affidavit. He added that trends in other areas, such as Baltimore-Washington and the Delmarva Peninsula, showed similar vulnerabilities for 2008.

The data also demonstrated, however, that PJM enjoyed a robust system-wide reserve margin across its entire footprint—as high as 33.5 percent in 2004, and 24.7 percent in 2005, with some forecasts showing a 20.4 percent margin in 2006-2007, declining to 16.8 percent in 2010-2011.

Moreover, according to Assistant Counsel Scott Perry, writing for Pennsylvania’s Department of Environmental Protection, information available on the Internet site of the U.S. Energy Information Agency this fall showed that in 2004 approximately 34 percent of the electricity generated in Pennsylvania was exported out of state.

So why the need for cpacity incentives? According to PJM’s Andrew Ott, vice president, market services, the region also had experienced a significant decline in recent years in power plants with flexible load-following characteristics and quick-start capability. Over the prior four years, load-following gen capability offered in PJM had declined, he said, by nearly one quarter. Also, its gen-fleet suppliers now offered fewer daily plant startups: from an average of 4.6 plant starts per day per seller in June 2000, to only 3.1 starts per day per seller in August 2004.

What was needed, claimed PJM, was a program for marshalling gen-plant capacity in specific locations with improved short-term operational characteristics, through the incentive of a substantial and dependable stream of capacity market revenue payments. Hence the RPM proposal, slated to take effect June 1, 2006, if FERC grants timely approval.