Dive Brief:
-
The PJM Interconnection’s most recent capacity auction was significantly affected by market design flaws, including one that enables generation owners to increase prices by exerting market power, according to the grid operator’s independent market monitor.
-
Monitoring Analytics estimates that PJM’s new “effective load carrying capability” availability metric increased revenue in the record-setting July auction by about $4.4 billion, or by nearly 50%, compared to its previous “equivalent demand forced outage rate” metric, the market monitor said in an initial analysis of the auction released Friday. Other factors also contributed to a jump in capacity costs from the auction, according to the report.
-
“The [base residual auction] prices do not solely reflect supply and demand fundamentals but also reflect, in significant part, PJM decisions about the definition of supply and demand,” the market monitor said. Monitoring Analytics called for changes to PJM’s capacity market rules.
Dive Insight:
PJM took issue with the market monitor’s analysis.
“At a time when significant generator retirements and increasing demand are causing system reserves to dwindle rapidly, we find the [market monitor’s] conclusion that much lower prices in our last capacity auction would have induced needed amounts of investment in generation capacity to not be credible,” Jeff Shields, a PJM spokesperson, said in an email Tuesday.
The report fails to include any review of factors that would potentially have increased the cost of capacity, including a specific sensitivity requested by PJM — namely what capacity prices would have been if several of the market monitor’s recommendations in its report on the previous base residual capacity auction had been followed, Shields said.
PJM will publish a response to the market monitor’s report in the near future, he said.
In late July, PJM said capacity prices in its latest capacity auction jumped to record highs and would cost consumers in its footprint $14.7 billion for the 2025/26 delivery year, which starts June 1, up from $2.2 billion in its previous auction.
A mix of factors — supply, demand and new market rules — contributed to the higher capacity prices in the last auction, according to PJM. For example, the ELCC framework for determining how much capacity resources can be expected to deliver affected the auction results, partly by reducing available capacity by roughly 2.7 GW, PJM said in an Aug. 21 presentation on the auction results.
Monitoring Analytics’s initial auction report honed in on several factors affecting the auction results. Instead of waiting to release a complete report on the auction, the market monitor said it is releasing the analysis of various sensitivities as they are completed to support decision-making for the next auction, set to begin on Dec. 4.
The analysis is based on assumptions, but the results show the “direction and magnitude” of the effect of certain factors in the PJM capacity market design, Monitoring Analytics said. The results of the different scenarios examined by the market monitor can’t be added up for a total cost impact because each change in assumption would have affected other factors that drove the market outcome, according to the report.
The market monitor found that PJM’s rules exempting wind, solar, energy storage and other types of resources from the auction’s must-offer requirement increased auction revenues by $4.1 billion, or nearly 40%, compared to requiring the resources take part in the auction.
Also, the fact that Talen Energy’s reliability must-run resources in the Baltimore Gas and Electric zone were not included in the supply curve at $0 per MW-day resulted in a $4.3 billion, or 41%, increase in auction revenue compared to including the power plants in the supply curve at $0 per MW-day, the market monitor said.
PJM’s use of summer ratings instead of winter ratings for combined-cycle and combustion turbine resources in the marginal ELCC based accreditation resulted in a $2.7 billion to $8 billion increase in auction revenue, depending on the impact on the reserve margin, according to the report.
The market monitor said PJM should end its must-offer exemption for renewables and energy storage. “The failure to apply the [capacity market] must offer requirement will create increasingly significant market design issues and market power issues in the capacity market as the level of capacity from intermittent and capacity storage resources increases,” Monitoring Analytics said.
But if renewable and storage resources are given a must-offer obligation, the owners of those resources shouldn’t be required to pay penalties when the resources don’t perform during periods when they are unable to produce electricity, according to the market monitor.
Also, the market monitor said the ELCC should be “significantly refined” by including hourly data that would permit unit-specific ELCC ratings, weighting summer and winter risk in a more balanced manner, ending non-performance penalty risks and paying for actual hourly performance rather than basing payments on relatively inflexible class capacity accreditation ratings derived from a small number of hours of poor performance.
PJM should treat reliability must-run resources consistently, according to the market monitor. Currently, the grid operator includes reliability must-run resources in its reliability analysis but doesn’t include them in its supply curves, according to the report.
“The goal is to ensure that the underlying supply and demand fundamentals are included in the capacity market prices,” the market monitor said.
Looking ahead to the next capacity auctions, PJM believes it is important to continue to ensure pricing that induces investment in needed generation and is fair to consumers who ultimately pay the bills, PJM’s Shields said.
“We’re working on several initiatives, including a review in partnership with the [market monitor] of unoffered and retiring capacity, a PJM proposal for further interconnection queue reform, and an accelerated quadrennial review,” he said.
