The time-honored discounted cash flow method for determining appropriate utility returns falls short when interest rates are low. Inadequate ROEs ultimately increase cost of capital and wipe away...
PJM Addresses Local Supply Issues
Electric shortages and the generation overbuild continue to co-exist.
The PJM Interconnection has evolved significantly over the past few years. PJM expanded its footprint enormously between 2002 and 2005. It now traverses 13 Mid-Atlantic and Midwestern states. The PJM regional transmission organization (RTO) now represents the world’s largest centrally dispatched electric grid, with installed capacity approaching 167,000 MW by the summer of 2007.
While maintaining its stance as the most sophisticated competitive electricity market in the country, PJM still faces several challenges, all of which are augmented by its expanded footprint. Most prominent is the RTO’s plan to implement a new capacity market construct, referred to as the reliability pricing model (RPM), as early as this summer. Further, parts of PJM are ailing from transmission congestion issues that limit access to abundant, cheap power sources in the region.
During the summer of 2006, PJM broke its peak-load record three times. PJM has registered a peak-load growth of 8.3 percent since 2005. At the same time, transmission congestion is causing localized supply shortages in PJM despite the overall overabundance of generating capacity in the region. The RTO is devising a new resource-adequacy construct aimed at providing sufficient price signals for where and when to invest in transmission and generation-capacity additions.
Capacity Market Evolution And Redesign Efforts
During the past three decades, PJM has gone through several capacity market designs. Starting in 1974, PJM imposed a two-year, forward-looking annual installed capacity (ICAP) obligation. This obligation was spread across the load-serving entities (LSEs), which were charged a capacity deficiency rate based on the cost of new capacity when failing to show adequate reserves for the next two years.
In 1999, PJM replaced the installed capacity obligation construct with the current capacity credit market design, which covers up to 12 months of capacity through daily and monthly capacity obligations and auctions to ensure sufficient reserves at all times. While this market has evolved substantially over time to include a wider regional cooperation and adjustment of obligations for outages, the concept still is based on a regional (PJM-wide) capacity requirement and a vertical ICAP demand curve.
PJM and many of its market participants have been concerned about two problems with the current capacity credit market. First, the regional clearing of the capacity credit market does not provide sufficient locational price signals of where new capacity is most needed and valuable. Second, the vertical demand curve combined with the relatively short planning horizon of one year does not furnish sufficient economic incentives for developers of generating and transmission capacity to construct the new capacity needed to ensure longer-term reliability in the PJM region. These issues are escalated by the rapid expansion of PJM’s footprint, which has more than doubled in the past few years.
On Aug. 31, 2005, PJM filed with the Federal Energy Regulatory Commission (FERC) its reliability pricing model (RPM) capacity market paradigm proposal. This new capacity market design had been under discussion among PJM