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Capacity Contest

Raising the stakes in RTO markets.

Fortnightly Magazine - February 2011

eliminates demand for the entire year. Efficiency providers can earn capacity payments on a given negawatt for no more than four years.

“The result is a forward capacity price signal that’s led to a significant investment, with more than 10,000 MW of cleared DR and efficiency,” says Andrew Ott, PJM’s senior vice president of markets. “That’s a big investment in demand response and efficiency.”

Indeed, negawatts of one kind or another represent by far the biggest share of resources offered in PJM’s capacity auction for the 2013/2014 delivery year—double the next-biggest category, new generation (see Figure 3) . Largely by virtue of clearing massive amounts of demand resources through the RPM capacity auction, PJM has managed to secure reserve margins well in excess of the NERC reference reserve margin—despite projections of substantial demand growth and plant retirements during the next several years (see Figure 4) .

The next step for PJM might be to extend the horizon for forward auctions beyond the current three years. “This is being discussed and debated among stakeholders now,” Ott says. How far into the future is part of the debate. Five years? 10 years? Long time frames for capacity bidding aren’t necessary, Ott says, but something longer than the RPM’s current four-year horizon ( i.e., a full year’s commitment in the third year ahead) would bring a greater degree of certainty to the market.

“Having forward capacity commitments doesn’t solve every problem, but it certainly narrows the uncertainties for purposes of resource adequacy and transmission planning,” he says. “It’s beneficial to have certainty out to a point, and from there you have scenario modeling—looking at a range of possibilities to see what might evolve. The information in forward capacity markets can better inform that kind of decision making by narrowing the scenarios.”

And, incidentally, extending the auction horizon might help prevent PJM from being leapfrogged by its next-door rival MISO, which is proposing enhancements to its VCA.

“FERC asked us to look at ways we can better coordinate activity across our seams, and provide better market-based price incentives for resource investments as well as consistency with our energy market,” Hillman says.

MISO and PJM finalized a new seams agreement in early January, and now MISO is working with stakeholders to develop its concept for a more robust capacity auction. Currently the VCA is limited to bids and offers a single month ahead. MISO’s December draft proposal envisions converting the monthly auction to an annual auction for full-year commitments, and opening the bidding horizon prospectively to between three and five years. MISO would create what it calls locational resource zones (LRZ), so bids and offers would reflect local constraints.

According to the MISO draft proposal, the enhanced auction would remain voluntary, but all load and capacity would be required to bid into the market; entities that don’t wish to actually buy or sell power via the auction would net themselves out by bidding load to match their offered supply.

This is the way MISO’s day-ahead energy market works now, Hillman says, with a large share of