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PJM Capacity Markets Still Structurally Non-Competitive

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March 11, 2011  

PJM's capacity markets are only competitive due to the application of market mitigation, the annual state of the markets report from PJM's Independent Market Monitor reiterated yesterday.

Although not surprising -- the entire PJM region failed the preliminary capacity market structure screen every planning year for which it was completed -- the results serve to contrast with continued protestations that the Reliability Pricing Model is inherently a competitive market which should be free from state interference.

The capacity market structure also failed the three pivotal supplier test (TPS) in addition to the preliminary capacity market structure screen.

Consistent with past years, the IMM did say that the outcomes from PJM's capacity markets were "competitive," but only due to the application of extensive market mitigation measures.

In addition to the aggregate capacity market being found structurally non-competitive, the local capacity market structure was found to be non-competitive as well. All modeled Locational Deliverability Areas (LDAs) failed the preliminary market structure screen for every planning year for which it was completed. For almost every auction held, all LDAs failed the TPS test, which is conducted at the time of the auction.

Among recommendations from the IMM related to the capacity market are eliminating the Short-Term Resource Procurement Target (2.5 percent demand offset), and addressing the New Entry Pricing Adjustment which would allow new resources to lock in capacity prices for up to seven years versus the standard three.

The local energy market structure was found to be non-competitive as well, due to, "the highly concentrated ownership of supply in local markets created by transmission constraints."

The results of the TPS test, used to test local market structure, indicate the existence of market power in a number of local energy markets created by transmission constraints. The local energy market performance is only competitive as a result of the application of mitigation, the IMM said.

Again consistent with prior findings, the market performance, and not just structure, of the regulation market was found to be non-competitive, because changes to the calculation of the opportunity cost resulted in a price greater than the competitive price in some hours and a price less than the competitive price in some hours.

The IMM also recommended that, "renewable energy credit markets be brought into PJM markets as RECs are an increasingly critical component of regulated wholesale energy prices." The IMM noted that certain generators receive revenues from RECs, but such revenues are not recognized by PJM.

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