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PJM results were competitive, but capacity market has significant problems, monitor says

From the March 19, 2014 issue of Public Power Daily

Originally published March 19, 2014

By Robert Varela
Editorial Director

PJM’s markets produced competitive results last year, but its capacity market has "serious design issues," the regional transmission organization’s market monitor, Joseph Bowring of Monitoring Analytics, said in the firm's 2013 State of the Market Report for PJM. Capacity market prices soared by 55 percent, from a delivery year weighted average price of $75.08 per MW-day in 2012/2013 to $116.55 per MW-day in 2013/2014. For the 2013/2014 delivery year, annual capacity market charges to load totaled approximately $6.7 billion, the report said. The report recommends a number of significant changes to the capacity market.

PJM’s markets have structural market power, but mitigation produces outcomes that are equivalent to those of a competitive market, according to the market monitor.

Capacity market prices are too low, according to Bowring. "A number of capacity market design elements have resulted in a substantial suppression of capacity market prices for multiple years," the report said. "The impact in the 2016/2017 base auction was about $4.6 billion." The market monitor "estimates that the actual net revenue results for 2013 mean that 14,597 MW of capacity in PJM are at risk of retirement in addition to the 24,933 MW that are currently planning to retire."

The most fundamental change needed to the capacity market design is the enforcement of a consistent definition of a capacity resource so that all capacity resources are full substitutes for one another, the report said. "The high demand days in the summer of 2013 highlighted the fact that demand resources are not full substitutes for generation for several reasons," the report said.

Energy prices in PJM in 2013 were set, on average, by units operating at, or close to, their short run marginal costs, the report said. A combination of increased, weather-related demand, and higher fuel costs led to an increase in energy prices compared to 2012. The load-weighted average cost of energy (LMP) increased 9.7 percent in 2013 compared to 2012, from $35.23 per megawatt-hour to $38.66 per MWh. Congestion costs increased in PJM by $147.9 million or 28 percent in 2013 compared to 2012.

Energy uplift charges increased by $231.4 million or 35.6 percent to $882.2 million in 2013 compared to 2012, primarily as a result of increases in charges for reactive services and charges for black start services, the report said.

The State of the Market Report is posted online.



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