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Capacity Contest

Raising the stakes in RTO markets.

Fortnightly Magazine - February 2011

2013, it is estimated that Maryland ratepayers will pay nearly $5 billion in capacity charges to incentivize the private sector to build new generation—enough to pay for seven new power plants—but no new base load generation will be built as a result of these incentives.”

O’Malley’s outrage is echoed by others who have lost their patience for the promised benefits of capacity auctions—especially given the recent RTO shopping by Duke and FirstEnergy, which seems to suggest capacity payments are mostly attracting existing resources rather than new construction.

“On the whole, capacity markets have been most effective at transferring wealth from customers to existing generators,” says Susan Kelly, vice president of policy analysis and general counsel at the American Public Power Association.

Kelly notes that new generation investment hasn’t materialized as promised by capacity market proponents when the construct was first conceived. “The rationalizations have changed,” she says. “Now PJM is arguing that RPM ensures resource adequacy by keeping existing units online that otherwise might leave the fleet. That’s not what it was supposed to do, and I don’t know that it’s smart to pay extra money to keep these old, smaller coal plants online if they otherwise wouldn’t be economic to run.”

Irrespective of whether it’s new or old capacity, however, PJM’s capacity auction arguably is working to reallocate oversupply from the Midwest to PJM, where demand is higher. Transmission additions, such as the TrAIL 500 kV line now being built from southwestern Pennsylvania into the territories of Allegheny Power and Dominion Virginia Power, might allow additional cross-regional wheeling—of coal-fired power as well as renewable capacity from those wind-swept plains in the Midwest. But that market opportunity also could encourage more Midwestern utilities to go RTO shopping.

Whether that ultimately turns out to be a good thing might depend as much on the patience of stakeholders in the markets as it does on the actions of RTOs and utilities.

“Profit levels among existing generators are substantially above cost-of-service levels. New entrants aren’t coming in, and prices are going up,” Kelly says. “Our question is ‘Why?’ Inquiring minds wonder, are competitive forces actually disciplining these markets or aren’t they? There are all sorts of unintended consequences and perverse incentives out there. I wish there was more critical examination of what’s going on, and not just a high priesthood saying ‘It’s all fine.’”

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