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PJM Addresses Local Supply Issues

Electric shortages and the generation overbuild continue to co-exist.

Fortnightly Magazine - April 2007

would acquire their long-term unforced capacity (UCAP) obligations, with the objective of ensuring long-term system reliability and energy market equilibrium, and sending price signals based on the future locational capacity needs. Consequently, the RPM would generate incentives for investing in new generation and transmission, and for retiring uncompetitive older units. The PJM RPM differs from its New York counterpart in that it uses a three-year planning horizon and it is open to transmission and generators alike. 2 Further, the RPM allows for not-yet-built capacity to bid into the market, aiming at providing revenue certainty to allow developers to finance and build new generation and transmission.

The RPM introduces a locational ICAP market in PJM similar to that of New York and the now shelved LICAP market proposal for New England. It introduces a sloping demand curve, called the variable resource requirement (VRR) curve, which was developed to provide adequate incentives for siting and building new generation and transmission—with more compensation available when reserves are below the target reserve margin levels and less when reserves are above target. This forms a demand curve, as illustrated in Figure 2. That figure also compares the originally proposed VRR curve to the revised curve proposed in the September 2006 settlement filing.

As shown, the settlement agreement preserves the structure of the VRR curve but establishes a lower value for capacity at all reserve margin levels—except for the 16 percent level. For example, the originally proposed VRR curve would allow capacity prices to rise to levels sufficient for a new gas turbine to recover 200 percent of its revenue shortfall when installed reserve margins were at 12 percent or lower. PJM’s recent settlement agreement caps the total recovery allowed at 150 percent. The revised VRR also yields a lower value for capacity than originally proposed at reserve margins higher than 16 percent (and lower than 20 percent).

The locational aspects of RPM are to be expanded in phases:

• For the delivery years 2007 through 2010, four local deliverability areas (LDAs) are used: SW MAAC, Eastern MAAC, MAAC region plus APS, and Rest of Market. 3
• After 2010, the LDAs will be expanded to include potentially more than 23 reliability zones or areas with a meaningful separation of these reliability zones existing only if ICAP values turn out to be different among the zones.

PJM hopes this locational market will give market participants sufficient economic incentives to resolve the existing capacity bottlenecks in eastern PJM, such as Delmarva, Baltimore, and eastern New Jersey. Along with its forecast of electricity prices, Global Energy prepares a forecast of the ICAP market values for selected locations under the proposed RPM construct. Our forecast shows ICAP values for selected locations where our analysis shows locational markets are most likely to be critical for ensuring future market reliability.

Transmission Congestion And Local Supply Issues

PJM develops an annual Regional Transmission Expansion Plan (RTEP) to identify transmission system enhancement requirements. The RTEP process identifies two kinds of upgrades: reliability-based upgrades and economic-based upgrades. PJM recently decided to extend its transmission expansion planning