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Capacity Owner CFO: Experience in PJM Capacity Market Has Been Like "Whack-A-Mole"; Warns "Steel in the Ground" Being Replaced by New-Build Generation That "May Not Be There"
The market design, and constant changes, of PJM's Reliability Pricing Model has been likened to the game of "Whack-A-Mole" by Exelon CFO and Executive Vice President Jonathan Thayer, as Thayer also warned that the market is replacing "steel in the ground" generation with new build generation that "may or may not be there."
Thayer was speaking at the Wolfe Research Power and Gas Leaders Conference yesterday.
"I would liken our experience with the capacity market in PJM, is a bit akin to the game of whack-a-mole at Dave & Busters," Thayer said.
"Of the moles that we've had to whack back in their holes, first was demand response. We've worked to refine the definition around what qualified as well as the quantity, such that it is being paid for the service it's providing," Thayer said.
"Subsequent to that on the MOPR and subsidized generation, that has been a big issue. We had a large stakeholder process last year to refine that and that was done within a 12-month timeframe, and mitigated some of the subsidized jobs-related contracting behavior of certain of the states, or at least made it a factor in how the auction cleared," Thayer said.
Noting the 8,000 megawatts of imports that cleared the recent RPM auction, Thayer said, "Imports [have] been a huge issue as well as, in effect, the free optionality of new-builds bidding in and then having the ability to acquire in subsequent auctions, the capacity they bid in, and even, in fact, profit from that."
"So in this stakeholder process, we are working to define: What is PJM actually capable of importing? How do we take the profit incentive out of the bidding behavior? And how do we weave in performance elements whether it's transmission construction to support imports or new-build construction as well as certain credit requirements to improve the delivery of, in effect, what exactly is RPM designed to do, it's designed to promote reliability. And we've seen with meaningful coal retirements and expected coal retirements as well as we've seen a replacement of baseload iron in the ground with the contractual right to turn someone off, or the prospect of new-build generation that may or may not be there. And we will see the impact of this on the back of 2015 with retirements. And I think PJM and stakeholders appreciate the importance reliability is to this equation, and so my sense is that there is a fairly good chance that the stakeholder process works its way through in time for next auction," Thayer said.
Given the PJM capacity market's unsettled market design (Whack-A-Mole) and unproven nature (new capacity which may not be there), it's unclear how PJM's capacity market is in any way appropriate for Texas.
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September 25, 2013
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Reporting by Paul Ring • ring@energychoicematters.com
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