Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Capacity Contest

Raising the stakes in RTO markets.

Fortnightly Magazine - February 2011

expected, the state will be required to enter 15-year power purchase agreements for 2,000 MW of new gas-fired combined cycle capacity, with that capacity to be offered in the RPM at a price of $0—effectively dumping a large chunk of capacity into the auction and forcing the clearing price downward.

The legislation has elicited fierce responses, both pro and con. Monitoring Analytics, PJM’s independent market monitor, issued a report last July criticizing the idea and warning lawmakers that it would backfire. “The result of such a subsidy would be to artificially depress the [RPM] auction prices below the competitive level… [R]evenues to generators both inside and outside of New Jersey would be reduced, as would the incentives to manage load and invest in cost effective demand side management technologies. [It also would] increase the probability that additional subsidies by New Jersey ratepayers will be required for any future capacity additions needed to maintain reliability.”

The market monitor further warned that such subsidies would have a contagion effect, forcing neighboring states to provide the same kinds of subsidies to bring capacity into their areas. As a case in point, the Maryland Public Service Commission took comments last year on the possibility of forcing regulated utilities to enter long-term power purchase agreements for new supplies located inside the state (Maryland PSC Case No. 9214) . The case arose from a request by independent power producer Competitive Power Ventures (CPV) for the PSC to compel Maryland utilities to negotiate 20-year PPAs for the output from CPV’s planned 640 MW combined cycle project in Charles County (Maryland PSC Case No. 9117) . On December 29, the PSC circulated a draft request for proposals (RFP) that stipulates BGE, Delmarva, Allegheny Power and Pepco will solicit bids to supply, in total, 1,800 MW of power capacity under contracts as long as 20 years.

Although the state wouldn’t be procuring the power directly, as New Jersey would under A3442, it would have a similar effect on the market—especially if bidders propose projects that would undercut the clearing price, which is precisely what CPV had promised to do with its project, and presumably would again in a bid under the prospective Maryland RFP.

“[I]t has been almost 30 years since a facility of the St. Charles Project’s scale and value has been constructed in Maryland,” wrote CPV’s attorneys at Dickstein Shapiro in an Aug. 18, 2009 filing before the PSC. “When a new resource of this size is bid into the PJM capacity auction at $0, the supply curve effectively will shift to the right, lowering the clearing price for capacity, and thus lowering the price of electricity throughout Maryland.”

Changing Rationale

By proposing the RFP, the Maryland PSC was responding in part to the pointed comments of Maryland Gov. Martin O’Malley about the apparent failure of capacity markets to attract new investments in power plants. “A perverse system of capacity charges imposed by [PJM] has … added hundreds of dollars to residential bills with little benefit,” O’Malley wrote in a December 2009 letter to the commission. “From 2008 to