Full Title: Capacity Performance:Changing the Game in PJM ISO
Author(s): George Katsigiannakis, Shanthi Muthiah, Rachel Green, and Himanshu Pande
Publisher(s): ICF International
Publication Date: 02/2015

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Description (excerpt):

The severe winter weather during the 2013–2014 “Polar Vortex” pushed the system in PJM closer to the brink than many thought was possible and led to historic price spikes in energy markets. This event shed light on the surprising weakness in the reliability of generation resources and potential flaws in the capacity market mechanisms meant to value both capacity and performance under constrained conditions.

In response, PJM has proposed phasing in a new capacity market design that compensates owners for reliability investments and penalizes underperformance. We find that the existing fleet can satisfy PJM RTO’s new CP requirements, but only if significant investments are made, especially by gas units lacking dual-fired capacity which may need investments in the range of $30/MW-day to $60/MW-day to comply. Based on our assumed cost for firm fuel supply and projected risk premiums, we anticipate that the price of the CP product in the upcoming auction will be in the range of $170 to $200/MW-day for RTO and significantly higher (at Net CONE levels) for some constrained MidAtlantic Area Council regions. We also project some concurrent decreases in energy prices.

These broad findings, combined with other implications of the PJM proposal described in this paper, would have significant consequences for market stakeholders. Low-compliance-cost oil, coal, and nuclear units will bid and clear first in the new capacity market, benefitting from higher prices. Gas-fired units without firm supply will in turn need to make significant and costly investments to meet PJM’s new requirements. All generators will have to adjust their capacity market bids to factor in a risk premium for underperformance penalties.