By some measures, merchant power assets look like a bargain, selling for well below their replacement cost. But whether low prices signal a buying opportunity or a value trap depends on the...
Improving Capacity Markets
FERC decision on PJM mitigation is a model for other ISOs and RTOs.
the recent FERC decision 5 to approve most of the proposed reforms to PJM’s new entry mitigation rules should improve that market’s ability to attract new resources.
The new rules are beneficial because they create a categorical exemption for a competitive entrant so that it wouldn’t be subject to unwarranted mitigation. This exemption, which is expected to cover a broad majority of new entrants, also will allow PJM to focus limited resources on only subsidized entrants that would directly result in unwarranted price suppression.
FERC accepted the PJM definition of a “competitive entrant,” which is any generator that is not: 1) able to pass on costs through a non-bypassable regulated utility charge; 2) contracted for more than one year through a state- sponsored or mandated process that is limited to new resources and; 3) the recipient of any material unit-specific governmental incentives. 6 This exemption has broad applicability and should be a standard feature of any organized electricity market that features a capacity market and buyer-side mitigation rules.
The most administratively efficient market rules are those that flag by exception – as opposed to scrutinizing every new entrant. Such approaches also allow buyer-side mitigation rules to work more effectively, which should enhance confidence in capacity markets. Accordingly, FERC should consider the standardization of its PJM order through a more generic rulemaking. To date, FERC has pursued a certain level of standardization in areas such as transmission planning, demand response, and frequency regulation – but not in capacity markets. As an integral part of competitive wholesale markets, standardization in capacity markets is the next logical step due to their importance in providing reliability by creating a price signal for new resources. To this end, the FERC technical conference on capacity markets in RTOs and ISOs should begin the discussion to determine when standardization would be appropriate. We believe that a standardized exemption for competitive entry would enhance capacity markets’ ability, because new entry wouldn’t be discouraged by an overbroad buyer-side mitigation rule. Further, consideration of standardization with respect to procurement periods and forward auctions also would be appropriate.
Ultimately, for competitive wholesale markets to succeed, it’s essential that they provide for the entry of new resources without reliance on regulated long-term contracts. Standardizing best practices that facilitate new entry should help.
1. FERC’s announcement of a technical conference on centralized capacity markets can be found here: http://elibrary.ferc.gov/idmws/common/opennat.asp?fileID=13284066
3. See PJM’s summary of May 2012 auction results that outline impending plant retirements as a result of new regulations: http://www.pjm.com/~/media/markets-ops/rpm/rpm-auction-info/20120518-2015-16-base-residual-auction-report.ashx.
4. See PJM’s summary of May 2013 auction results here: http://www.pjm.com/~/media/markets-ops/rpm/rpm-auction-info/2016-2017-base-residual-auction-report.ashx.
5. FERC’s decision conditionally approving PJM’s new buyer side mitigation rules can be found here: http://elibrary.ferc.gov/idmws/file_list.asp?accession_num=20130502-3038
6. FERC also approved an exemption for units built to supply native load since it’s a long-standing utility and public authority business model under which vertically integrated utilities are required