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Exelon SVP: PJM Capacity Market a "Recipe" for What Can Happen in Texas (Does This Include Outages and Demand Destruction?)
"What we see that has happened in PJM is a recipe for what can happen here in Texas," if a capacity market is adopted, William A. Von Hoene, Jr., Senior Executive Vice President & Chief Strategy Officer for Exelon, said in addressing the Gulf Coast Power Association.
While Von Hoene was apparently touting that as a success to be emulated by Texas, given retail electric rates and the status of the economies of the states within PJM, we are not so sure that this is a "recipe" that's desirable for Texas.
Von Hoene specifically said that the PJM capacity auctions have induced 28,000 MW of added new generation during the 10 auctions held to date (20,000 MW of generation has retired). Von Hoene did not address the fact that some of this generation is "planned" and that numerous incumbent generators have questioned the ability of such planned generation to actually get built.
However, Von Hoene also readily observed that, "if you look at PJM, what you see is happening is demand has curtailed."
"We have negative demand in Chicago, we have negative demand in Philadelphia, negative demand in Baltimore for the last three years, " Von Hoene said.
This experience is the opposite of the demand growth being experienced by Texas.
Von Hoene did not address what was driving this PJM demand destruction, instead insinuating that it was a triumph of the PJM capacity market to get new generation built despite the drop in demand.
However, we view this as a tortuous view that misses the obvious implication.
Demand in PJM has fallen because, through the capacity market, a new tax was placed on electricity use. Manufacturers have moved elsewhere (to states such as Texas) where they are not subsidizing power plants' fixed costs so generators can reap inframarginal energy market profits without the risk of having to recover fixed costs (in vertically integrated states, while end users may subsidize fixed costs, end users receive at-cost energy from such subsidized plants).
The negative demand in PJM represents demand destruction from economic stagnation and failing economies. While we do not pin the failing economies of the PJM states solely on its decision to enact a new electricity tax via the capacity market, the higher electric rates faced by businesses and industries in PJM as a result of the capacity market cannot be ignored. Indeed, while most PJM states can be considered inhospitable to business, these are long-standing climates, and demand had previously been increasing despite these states' generally inhospitable business climates. The capacity market, however, is one of the few novel regulatory burdens placed on businesses in these Northeast states which coincides with the falling demand reported by Von Hoene.
As an added insult, PJM customers are not even assured of resource adequacy for the billions paid in the capacity market. Just a few weeks ago, it was PJM -- not Texas -- which was forced to shed firm load due to, among other things, the unavailability of generators, both from forced outages, and from generators which could operate but which were offline and which could not be started in-time to avoid firm load shed. We do not think this is a "recipe" that works for Texas.
Since centralized, forward capacity markets were first proposed, businesses have warned of their negative impacts on economic activity and jobs. From the initial joint protest filed against PJM's Reliability Pricing Model capacity market by the PJM Industrial Customer Coalition, Electricity Consumers Resource Council, Illinois Industrial Energy Consumers, Industrial Energy Consumers of Pennsylvania, Industrial Energy Users of Ohio, West Virginia Energy Users Group, and Portland Cement Association, on October 19, 2005:
"Unnecessarily inflating capacity costs through RPM, particularly without any guarantee of increased reliability, will harm businesses' competitive position when compared to other regions of the country as well as overseas," the joint loads had said
The negative demand cited by Von Hoene bears out these customers' warnings.
Ignoring the avalanche of real-world evidence that businesses, through their continued relocation and expansion actions, continue to prefer Texas to the PJM states and other capacity market states, Von Hoene nakedly claims that Texas must adopt a mandated reserve margin, because continuing as the sole market without a mandated reserve margin, "puts Texas at a disadvantage to other states in terms of continued economic growth." No evidence was cited to support this bald assertion.
What would be a real disadvantage to Texas businesses would be the government-imposition of a new unavoidable charge placed on customers to support the ability of one group of private investors to earn returns on their investments, without any regulation on the level of return on such investments, and for the actions that such private investors were going to perform without such subsidy (i.e. be available to sell energy).
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October 2, 2013
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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