PJM defends market structure, cautions against state intervention in new report

Dive Brief:

The PJM Interconnection, operator of the largest wholesale electricity market in the U.S., released a study last week defending its market structure for capacity resources and warning that state power policies could derail efficient competition, RTO Insider reports.
Prompted by concerns that PJM's market is threatening reliability by forcing power plants offline prematurely, the report compared the market's retirement rates with those of fully-regulated regions. Researchers concluded the PJM system is not prompting premature retirement and has provided adequate incentives for new generation.
State power policies, such as incentives for legacy generation or renewable energy, could inhibit the proper functioning of PJM markets, the report warned. While power subsidies are widespread across PJM's territory, the grid operator cautioned against policy that "materially distorts price outcomes in PJM’s capacity and energy markets."

Dive Insight:

PJM's study, "Resource Investment in Capital Markets," was commissioned to answer one basic question, its authors wrote:

Can we rely on PJM’s organized wholesale electricity market to efficiently and reliably manage the entry and exit of supply resources as external forces create tremendous uncertainty and potential industry transformation?

The answer, according to the grid operator's own analysts, is an unequivocal yes — if state power policies don't mess it up.

The study, RTO Insider notes, comes in two parts. First, it addresses the retirement of legacy power plants — mostly coal-fired resources that have been pushed offline by a combination of low gas prices and federal emissions regulations.

Some generation interests have claimed the PJM market forces these otherwise operational plants offline too quickly. The study found little merit in those claims.

"A statistical examination of retirement data in PJM compared to regulated environments refutes any assertion that PJM markets are prematurely retiring economically viable generation," it reads. "When faced with similar capital investment requirements, generator retirements are roughly comparable in market and regulated environments."

PJM's market has also been successful in attracting new, cost-effective generation, the report argues.

"For the years 2010-2015, approximately 134,000 MW of proposed natural gas generation entered the PJM generation queue," it notes. "There now are approximately 74,000 MW in active development, 19,500 MW in service, 3,500 MW in partial service and 35,000 MW under construction."

Compared with some large generation projects from regulated utilities, such as the Kemper gasification plant and the Vogtle nuclear facilities, new gas generation is much cheaper for consumers, the PJM authors wrote.

"Investment in high capital, high risk and experimental technologies will not find footing in PJM as they might in regulated regimes," the report reads. "The price of these projects is intolerably high in contrast to the natural gas combined-cycle alternative that today’s market offers."

In the second part of the report, PJM analysts address state power policies and how they affect market operations. While subsidies of many types are inherent in a market like PJM's, the report warns that supporting certain generation resources presents "trade-offs" in the operational efficiency of the market.

"Policymakers must weigh these trade-offs," the authors wrote, "but understand that pursuing individual actions that 'defeat' efficient market outcomes will aggregate to a point they will altogether thwart effective operation of the market to the point it can no longer be relied upon to govern resource exit and entry and attract capital investment when needed."

Appreciating the trade-offs, the paper concludes, can lead to "policies to protect or advance other social, economic or political interests can be implemented in such a way as to minimize or even eliminate the destructive harm to electricity market structures."

Stakeholders in PJM and elsewhere are getting a first-hand experience in weighing those power market trade-offs. Last month, FERC blocked plans in Ohio to subsidize a group of aging coal and nuclear plants that would otherwise be uneconomic in the grid operator's market. PJM had asked the federal agency to intervene in the case and offered a shot across the bow for other subsidy proposals in its report:

"The simple fact that a generating facility cannot earn sufficient market revenue to cover its going-forward costs does not reasonably lead to the conclusion that wholesale markets are flawed," PJM wrote. "More likely, it demonstrates that the generating facility is uneconomic."