The PJM Interconnection LLC this month completed its third auction using the new Reliability Pricing Model (RMP) capacity construct, and while PJM officials are upbeat about the trio of results, critics argue that it will take more than a few auctions to determine whether the model is a success or a failure.
The regional grid operator, with approval from FERC, this year began to implement the RPM, which relies on a sloped demand curve and locational prices to determine capacity prices (see Power Market Today, Dec. 22, 2006). According to the Federal Energy Regulatory Commission, the auction process is intended to better promote resource availability at times and locations when and where needed.
The first RPM auction was held in April with results applying for a period beginning June 1 through May 31, 2008. PJM held its second auction in July, with results applying to 2008-2009. And the grid operator completed its third auction using the RPM earlier this month. PJM officials said the auction helped to clear 893 MW of demand response for the 2009-2010 delivery year (see Power Market Today, Oct. 15).
PJM's next auction is scheduled for January, and with three events now under its belt, the grid operator is praising the results to date. It stated that all together, the three auctions have added 2,589 MW of new generating capacity. Additionally, available capacity in 2009-2010 increased by 9,107 MW as a result of the RPM implementation. PJM stated that the auctions have produced the "intended results: more demand response, reduced power plant retirements and additional generation."
The Electric Power Supply Association said the results of the latest PJM RPM auction "confirm that these new capacity markets are starting to work as intended." However, not everyone agrees. James F. Wilson, who as a principal at LECG LLC analyzes energy markets, said he found some aspects of PJM's RPM process troubling.
Although "it is too soon to conclude that RPM is working...the evidence to date suggests the contrary; that it is not attracting new capacity where needed, and the bidding and price formation in the auctions are not as intended and expected. Prices are rising, but capacity additions are not keeping pace with requirements." In the third auction, Wilson noted that there was "time for resources only in the planning stage to have been offered, but apparently this occurred only to a very limited extent."
Contrary to what the RPM is intended to do, "the highest priced areas are not attracting more capacity than lower priced areas; in fact the opposite appears to be happening," in particular, he said, the Southwestern Mid-Atlantic Area Council (MAAC).
"This may reflect that the obstacles to capacity expansion in these areas are complex and unlikely to be overcome by financial incentives," said Wilson. "This may also suggest that the market power incentives to withhold capacity, or price it very high, have been more influential than the incentive to introduce more capacity. Or, market participants may be hesitating, anticipating that transmission will be built into this zone, which could eliminate the zonal price advantage."
However, whether the model is working or not, the analyst said "it is clear that it is very expensive for consumers. Capacity prices for the first three RPM delivery years reflect an approximately $15 billion increase in capacity value relative to the highest capacity price from the prior four years, adjusted for inflation." The RPM prices also are "much higher than PJM's simulated values from late last year. This suggests that RPM is not going as intended or expected."
PJM, he said, "has not explained why the auction prices are so much higher, which would assist in identifying and addressing whatever problems may exist and be contributing to the high prices." In the third auction, especially in the Southwestern MAAC zone, Wilson noted that there were "much higher mitigated bid prices," which suggests that "market participants may be finding ways to get around the mitigation and bid more capacity at higher prices."
For example, he noted that the bid prices in the Southwestern MAAC zone were much higher than reflected in PJM's earlier simulation of the 2009 delivery year, suggesting that PJM did not anticipate how capacity sellers would be able to justify high bid prices. "The market power mitigation designed into RPM may not be working as intended to protect consumers."
PJM "likely will have to provide many more details about the results of these auctions before stakeholders will be satisfied that they were implemented according to the PJM tariff and RPM settlement, and do not reflect misuse of the flexibility offered under the RPM rules, incomplete mitigation, or other unintended factors that may have distorted the RPM prices," said Wilson.
Steve Goldenberg, who represents New Jersey pharmaceutical companies and manufacturers, said his group was not happy. "No one should be happy," he said. "All we're seeing is still higher prices, without any guarantees that new power plants will be built."
Duquesne Light Co. in September asked FERC for expedited relief from the auctions, a request that FERC denied (see NGI, Oct. 1). Duquesne, which wants to join the Midwest Independent Transmission System Operator (ISO), had argued that the RPM process would lead to inflated capacity costs.
"Duquesne is profoundly dissatisfied with the level of the capacity costs emerging from the first two base residual auctions," Duquesne said in its filing with FERC in September. "In light of these greatly increased capacity costs, Duquesne has determined that continued membership in PJM no longer constitutes an economically reasonable course of action, for it and its customers" (see Power Market Today, Sept. 25).
Duquesne spokesman Joseph Vallarian said the "way PJM is doing its pricing models, we feel it's going to raise prices for customers," and he said that was not something the utility "was interested in doing. The RPM auctions "are going to cause future generation rates to rise significantly," whereas the Midwest ISO "allows parties to negotiate the market contracts among themselves, rather than setting a price for capacity."
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