FERC Filings
EPSA's Motion to Intervene and Comment on PJM's RPM Proposal
Comments
A. Effective Forward Price Signals Are Needed To Incent Ongoing Investment in Capacity
Ensuring electricity system reliability is of the utmost importance, and requires the availability of adequate power supplies. Due to the significant lead times involved in the development of new generating capacity, electricity consumers cannot wait to address shortages when such shortages occur. Thus, efficient markets and price signals are required to incent the investment necessary to ensure the availability of sufficient installed capacity resources. In organized short-term wholesale electricity markets like PJM, these signals should occur through the energy markets. However, in these same markets, a variety of factors prevents the formation of energy prices necessary to incent investment. These factors include extensive mitigation programs intended to prevent generator bids from setting very high peak energy prices. Yet, without such prices, PJM’s energy market does not send sufficient long-term price signals for investment for new generation capacity or the sustainability of some existing generation. At the same time, the current capacity market’s characteristics keep capacity prices below the levels needed to attract and sustain investment in needed generation. Hence, as recognized by nearly all PJM stakeholders, a reformed, forward-looking locational capacity market mechanism with a downward sloping demand curve is necessary in PJM to ensure that there are opportunities for revenue sufficient to incent new generation and sustain existing generation.
While wholesale competition has provided consumers in organized markets significant savings by spurring efficiency and shifting risks from consumers to investors, investors also need regulatory certainty and adequate price signals in order to commit the necessary capital in a market. Well-designed capacity markets can provide investors with that necessary confidence in today’s markets. According to a report issued by Citigroup/Smith Barney this spring,
Robust capacity markets should improve system reliability by incentivizing generators to maintain spare capacity on the grid….Capacity markets provide financial incentives to generators to maintain spare capacity that might otherwise be retired and build capacity with enough lead time to mitigate energy price spikes. Capacity markets should lessen the severity of price shocks when they occur, in our view, improving system reliability over time.
From the electricity market perspective, New York ISO Market Advisor David Patton observed about supply constraints in that state, which utilizes a downward-sloping demand curve capacity mechanism,
…. (the) capacity requirement in New York pretty much solved that problem. It allows existing generators the funds they need to maintain their generation and new generators to site.
FERC’s 2004 State of the Market Report documents the success in New York as well, noting that 1,258 megawatts of capacity came on line in New York during 2004. David Patton concludes that after two years in place,
…revenues from the capacity market play a critical role in the conclusion that the economic signals in New York City would support new investment. This is an important result because NYC capacity levels are close to the minimum required to maintain reliability.
In contrast, FERC notes that for California, where there is extensive market mitigation and no capacity market mechanism, “[g]iven potential problems in southern California in the summer of 2005, the question is whether electric power price signals for new investment will provide enough lead time to build new plants or transmission before shortages occur.”
In order to prevent future capacity shortages and to provide investors with efficient price signals and market certainty, PJM has proposed the RPM mechanism, which includes a downward-sloping demand curve similar to that used by the New York ISO and approved by the Commission. Additional elements of the RPM proposal are unique to RPM in order to address issues that are specific to the PJM region.
B. The RPM Proposal Is Necessary and Should Be Approved Expeditiously To Meet Capacity Needs in PJM
PJM, like much of the northeastern part of the country, will face the need for more generation investment in the near future. Given the lead times for generation development and construction – especially for baseload generation – the cycle of investment for that new generation needs to begin soon if new units are to be added in a timely and efficient manner. Added to the mix is the potential for generation retirement, thereby shrinking further current capacity surpluses and pressuring the need for new investment or a more effective mechanism for assuring existing generation with sustainable cost recovery.
Appropriately designed capacity markets are a necessary element in competitive wholesale markets as they exist today. PJM’s short-term energy markets dampen the price signals that would be realized in a fully competitive market. Without such energy market signals, a capacity market such as the RPM will be needed. And while there is a capacity mechanism in PJM today, it does not function adequately. The current mechanism does not include important elements that are part of the RPM proposal, including a locational element and a downward-sloping demand curve. Consequently, EPSA urges the Commission to acknowledge the critical need for the RPM in PJM within the current market construct while concurrently addressing stakeholder differences about particular mechanisms and rules.
The PJM RPM proposal was filed with Commission on August 31, after four years of extensive consideration through the PJM stakeholder process. That process, which included numerous planning meetings, was capped by a technical conference held by the Commission on June 16, 2005. According to PJM,
This [RPM] filing follows years of effort by PJM and stakeholders to reform capacity rules, including scores of meetings, intensive review of the RPM proposal for over a year, two presentations by stakeholders directly to the PJM Board of Managers and a Commission-sponsored technical conference earlier this year.
Based on stakeholder input, the PJM Board filed a modified version of RPM with the Commission as the best method for protecting the interests of the PJM grid and PJM electricity customers. An important feature of the RPM is its consideration of a balanced process for making regional planning decisions that address transmission constraints in order to facilitate competitive regional wholesale market development and bring the benefits of lower electricity prices to consumers. To realize these benefits, the PJM RPM proposal provides a plan on how transmission, supply and demand-side solutions are all fully included as capacity options so that the optimal market-based solution can be utilized. The RPM establishes a comprehensive evaluation process that looks at the full range of transmission, supply and demand options to satisfy reliability criteria, rather than focusing on generation alone. Hence, all reasonable, economic options are fully and fairly considered in order to achieve the most economically efficient and reliable capacity solutions.
In PJM, stakeholders agree that the existing PJM capacity mechanism is not working and must be replaced. Hence, EPSA endorses the RPM proposal filed with the Commission. While competitive suppliers may differ in their support of various RPM details, there is agreement that there remains an urgent need to provide the right market signals to encourage new investment and sustain existing generation capacity. Without new and timely investment in the face of increasing demand and plant retirements, reliability may be jeopardized. Therefore, the RPM is needed now. While stakeholders may continue to endorse certain changes to specific details of the RPM proposal, these discussions should not be allowed to detract from the overarching need for the Commission to approve the RPM as filed for the benefit of the PJM region.