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Priorities: PJM Files Tariff Changes to Curb Price-Dampening 'Speculation' in Capacity Market; Ignores Actual Failures By 'Physical' Resources (See 40% Forced Outage Rate)
Not that we needed more evidence that the PJM capacity market is designed to inflate wealth transfers to incumbent asset owners, but PJM's latest filing to reform the Reliability Pricing Model to curb alleged "speculation" (behavior which has the effect of reducing consumer prices) is simply another example of this reality.
Despite little (if any) evidence that consumers -- for whose benefit the capacity market is purportedly designed -- are harmed by what PJM considers "speculation" in the capacity market, PJM is proposing a series of further rules and regulations to curb this behavior -- which in most "markets" would simply be considered efficient pricing.
Specifically, because the incremental auctions typically result in lower prices than the base residual auction, PJM considers reliance on the incremental auctions to fill a capacity obligation from the BRA as amounting to speculation, and therefore concludes that a supplier's original BRA capacity offer was not "physical."
We wish to stress that if customers are going to be compelled to pay for capacity, such capacity absolutely must be delivered, and we have no quarrel with ensuring performance.
However, while we admittedly did not read all 576 pages of PJM's filing as our attention was devoted to more meaningful developments (PECO default service, etc.), we are not aware of a single instance in which a capacity resource offering into the base residual auction, which then later relied on an incremental auction under the behavior considered suspect by PJM, has failed to deliver capacity (at least as a result of the suspect behavior). If there are any such instances, they are few, and were not highlighted by PJM.
In contrast, it is indisputable that physical capacity resources failed to deliver capacity during the January PJM emergency, when forced outage rates reached as high as 40%.
Given this real-world experience, it would seem, to us, more prudent to focus on tariff changes requiring such "physical" resources to actually deliver the promised capacity (and preferably without waivers to long-standing price caps), rather than PJM's speculative fears about non-physical capacity clearing the BRA which then may not be converted to physical capacity in the incremental auctions.
Of course, when the primary motivation of PJM's filing is to increase the base residual auction clearing price, rather than actually ensuring customers get the capacity they paid for, PJM's focus on eliminating price-dampening "speculative" capacity commitments, rather than addressing the intolerable forced outage rate, becomes clear.
We will not waste our breath on all of PJM's proposed changes here -- suffice it to say, they further transform the Reliability Pricing Model from a "market" to a command-and-control administrative construct. Notable is that PJM proposes to assess on every replacement capacity transaction a Replacement Capacity Adjustment Charge equal to the difference between the BRA price and the IA price, assessed anytime the BRA price is higher than the IA price.
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March 11, 2014
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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