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Generators: PJM Plant Retirement Plan Highlights Bigger Problems

December 6, 2004
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Generators: PJM Plant Retirement Plan Highlights Bigger Problems

Regardless of the merits or faults of a recently proposed generator retirement policy by PJM Interconnection, there are deeper market design flaws that the regional transmission organization (RTO) must address in order to ensure reliability in its footprint, generators told FERC in recent filings [EL03-236].

PJM recently filed a proposed process at FERC under which the RTO would address a request by a generation owner to deactivate a unit, determine whether established reliability criteria would be violated if the unit were deactivated and provide compensation to the generation owner when a unit proposed for deactivation is required to continue operating for reliability.

Noting that nearly 3,900 MW of generation is seeking to retire before the end of the year, of which approximately 1,100 MW have been identified as raising potential reliability issues, PJM wants the Commission to act on its filing as early as possible.

"If, as PJM has identified, generators with 1,100 MW of needed capacity are requesting exodus, it follows that market signals do not reflect actual demand based on system security and reliability needs," Calpine said in a Nov. 23 filing responding to PJM's proposal.

"While, as a physical matter, PJM must discourage their exit in order to keep the lights on, it is not fair to relegate those unit owners to making the choice between the certainty and convenience of only going-forward costs plus some adder (Deactivation Avoidable Cost Credit) or the frustration and complication of justifying a cost of service rate." Calpine said that the generators in question "should not have to shoulder the consequences of the fact that PJM and load have planned themselves into a corner."

Calpine said the appropriate solution to control generator deactivation is to change the market design and operation in a way that prevents the necessity of forced operation, which means that realistic planning assumptions must be adopted.

Generating resources that are not under long term contract to support the capacity obligations of one or more loads over the planning horizon in PJM's Regional Transmission Expansion Plan (RTEP) should not be relied upon to satisfy security and reliability criteria in the planning base case, the generator argued.

"It is this type of approach that Calpine suspects has allowed load serving entities to be complacent about system infrastructure needs. If load serving entities can defer forward capacity purchases from units, wait until closer to real time, and still be assured that the lights will remain on by PJM forcibly requiring generators to continue their operation despite market signals, there will be no incentive on those buyers to purchase the requisite reliability services of those generators through the market."

Calpine said that now that past market flaws have resulted in the current retirement "crisis," a transitional retirement and deactivation procedure is probably required. "However, that this procedure is truly transitional should be confirmed by requiring changes in the RTEP process. No longer should load be allowed to rely upon the existing generator infrastructure investments of others absent a mutually agreeable price and contract, instead of the mere payment of the Deactivation Avoidable Cost Credit."

Meanwhile, affiliates of Constellation Energy said that while they support the implementation of the generator retirement policy, with certain modifications, they urged the Commission to "recognize that more fundamental reforms are needed within PJM to improve market price signals."

The Constellation affiliates said that an improved capacity market design is one way, and efforts to reform the capacity market are currently underway at PJM in the PJM-Resource Adequacy Model Stakeholder Working Group.

"Other necessary reforms should focus on the adoption of a rational approach to pricing for frequently mitigated units and the development of scarcity pricing mechanisms to ensure more accurate LMP price signals during periods of short term scarcity conditions."

The Constellation affiliates said that FERC's approval of the generator retirement policy should "clearly recognize that such a policy merely is a stopgap method to solving a more fundamental problem of a flawed market design. Where such methods are necessary in the short term, it should be clear that they are intended for limited circumstances. If the implementation of the generator retirement policy becomes a widespread mechanism by which capacity and energy are priced in the PJM markets, the development of competitive markets will suffer significantly as cost based revenue streams will become the norm, rather than the exception."

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