PowerFacts
Report Highlights Value of PJM's Reliability Model
IN EARLY STAGES RPM ALREADY PROVIDING VALUE TO CONSUMERS
- "Capacity is, by its nature, a long-term product, but PJM capacity had previously been traded daily; in RPM [Reliability Pricing Model], an annual product is traded on a forward basis, allowing better coordination with transmission planning. Since it takes several years to build new capacity resources, RPM moves the primary market-clearing auction to occur three years prior to the delivery year, allowing new entrants to compete on equal terms with incumbents." (Robert Stoddard, "Reliability at Stake," CRA International, May 5, 2008, p. 3)
- "In a highly regulatory regime, central planners develop a resource plan, develop the preferred resources, and place the full set of costs and risks onto consumers. The alternative is to rely on market forces to sort out investment decisions, placing the risk on investors. The ability of central planning to chart an optimal course in uncertain waters has never been high, and as uncertainty increases, the advantages of relying more on market forces become even more compelling."(p. 10)
- "Centralized capacity markets allow for extensive market monitoring and, as needed, mitigation; the results are transparent and subject to review by federal and state commissions; and any participant found guilty of attempting to manipulate market outcomes is subject to fines of up to $1 million per day under FERC's [Federal Energy Regulatory Commission] new civil penalty authority." (p. 30)
CERTAINTY AND SUSTAINABILITY OF RPM IMPORTANT FOR INVESTORS AND CONSUMERS
- "The specter of a complete regulatory overhaul of the resource adequacy mechanism in PJM, however, is an enormous and unnecessary risk facing investors today. Such agitation for a bottoms-up rebuild of a resource adequacy mechanism may be a self-fulfilling prophecy: the risk that calls for fundamental redesign may freeze investment in PJM until the regulatory environment is stabilized." (p. 11)
- "Provided that all resources are paid the same capacity clearing price in each location, capacity markets do not distort the investment decisions among technologies. In calculating net revenues, developers would naturally consider the expected cost of any plant emissions, so a low- or no-emissions project would have a cost advantage over its more-polluting counterpart, all other things being equal. The winning projects in the auction, therefore, are those that produce the most valuable mix of products." (p. 25)
- "First, the goal of capacity market mechanisms is to ensure resource adequacy; this may, or may not, be best accomplished by attracting new resources. Consequently, a capacity market must not only attract new resources, when economic, but retain existing resources, again, when economic. One of the key efficiencies of a well-designed capacity market is to find the balance between retirements and new builds." (p. 26)
- [I]t is bad public policy to attempt to institutionalize price discrimination among resources. It can result, perversely, in higher costs to consumers. Stated another way, any attempt to discriminate between new and old resources leads to premature retirement of "old" resources and a corresponding overreliance on more expensive "new resources." (p. 42)
- "Compared to energy-only markets and bilateral-only markets well-designed centralized capacity markets have been fairly durable. Moreover, there is no reason to believe that they are not sustainable going forward. This sustainability creates tangible benefits for consumers. If a resource adequacy construct were unstable or to invite frequent out-of-market intervention by regulators, many investors would simply look elsewhere to invest or require a significant premium." (p. 28)
CONTACT: JOHN SHELK
(202) 349-0154or 703-472-8660
EPSA is the national trade association representing competitive power suppliers, including generators and marketers. These suppliers, who account for nearly 40 percent of the installed generating capacity in the United States, provide reliable and competitively priced electricity from environmentally responsible facilities serving global power markets. EPSA seeks to bring the benefits of competition to all power customers.