[BETA] Fortnightly

Recently, generator investment adequacy questions involving different independent system operators and regional transmission organizations (ISO-RTO) demonstrated challenges facing policy makers and market stakeholders in maintaining resource adequacy. These questions arise from market and regulatory dynamics, including low gas prices, new environmental regulations, high growth of variable renewable resource generators, and dissatisfaction by some regional stakeholders with market outcomes.

In May, PJM Interconnection conducted its annual auctions to secure electric capacity three years from now. As expected by most analysts, the Base Residual Auction (BRA) for delivery year 2015-’16 electric capacity cleared with moderately higher prices in most of PJM versus the prior year, due to retirements of coal plants. (See Figure 3)

However, prices in FirstEnergy’s American Transmission Systems Inc. (ATSI) zone in Northern Ohio weren’t just moderately higher, but through the roof, reaching $357 per megawatt-day, the highest zonal price ever recorded in PJM Reliability Pricing Model (RPM), and 183 percent above comparable zonal pricing in the prior annual auction.

It’s tempting to simply assign ATSI’s high cost to the double whammy of coal plant retirements and constrained transmission—except for a fortuitous natural experiment that occurred during the 2015-’16 BRA. In the normally more constrained EMAAC locational deliverability area (LDA) of PJM, prices cleared at a moderate $167.46 in the same 2015-’16 auction, 47 percent of the ATSI price and just 22 percent above prior year. EMAAC is composed of the states of New Jersey, Delaware, and the Philadelphia area of eastern Pennsylvania. The natural experiment that allows comparison of the ATSI to the EMAAC situation occurred because the State of New Jersey was offering out-of-market subsidies for 2015-’16 and beyond, for generators willing to build up to 2,000 MW of capacity in the state while bidding into the PJM auction.

Based on information that’s publicly available about these subsidy contracts, and some generator offers for capacity, and clearing in both ATSI and EMAAC, we can examine how some investors in generation responded to market price signals, or, alternatively, to subsidy offers. The answers indicate that the market framework for ensuring resource adequacy remain challenging even in a forward capacity market as successful as PJM.

The Effect of Subsidies

In offering the capacity subsidies, the government of New Jersey cited high capacity payments—funded by ratepayers—and local resource adequacy needs. In response, PJM and its market monitor sought and obtained a FERC ruling designed to ensure that new entrant generators that contracted for out-of-market payments couldn’t count such revenues in their bids into the auction, thereby putatively ensuring continued fair offers by all players, whether subsidized or not. PJM and the market monitor cited the need to protect a fair and competitive market for this policy.

The resulting Minimum Offer Price Rule (MOPR), approved by FERC at its core, dictated