Texas Take Note: FirstEnergy CEO Says PJM Capacity Market Has "Fundamental Flaws" Which "Impede Investments," "Impact Reliability"

The design of PJM's capacity auction has "fundamental flaws" which will not only "impede investments," but also, "impact reliability," said Anthony Alexander, President and Chief Executive Officer of FirstEnergy Corp.

"Respecting the PJM auction, I believe that there are significant and fundamental flaws in the process. These flaws will not only impede investments in competitive generation resources and the development of a robust competitive market, but will also, ultimately, impact reliability," Alexander said during an earnings call.

"We will continue to work with PJM and others to address these flaws, and in some cases, loopholes that encourage gaming the system," Alexander said.

The comments from the chief executive of FirstEnergy is only the latest in a string of asset owners citing significant problems in the PJM capacity market, including some which have questioned the ability of the market to maintain resource adequacy.

Calpine executives recently cast serious doubt on the ability of much of the new build generation clearing the 2016/17 capacity auction to get built (see prior story). Exelon executives faulted several "anomalies" in the PJM capacity market which require fixes, and said that current pricing is not reflective of the long-term capacity revenues needed to support new generation development.

And American Electric Power CEO Nicholas Akins recently equated treatment under the PJM capacity market to socialism (see prior story).

The PJM capacity market is the design Texas capacity market supporters wish to most emulate, if not outright copy (notably, their counter-argument against the lengthy time to implement a capacity market in Texas is that the existing PJM design could be grafted onto ERCOT with little effort).

However, these comments from four of the leading capacity owners in PJM show that, at the very least, the PJM design for a capacity market is, "not ready for prime time," and has significant issues from an investors' perspective which augur against implementation in Texas, unless Texas just wants to import all these problems of the PJM market into ERCOT (and this ignores the strong regulator and consumer problems with the PJM capacity market design).

However, more broadly, this chorus of investor criticism of the PJM capacity market raises serious doubt that any capacity market design is workable. In terms of delivery years procured, the PJM Reliability Pricing Model capacity market has been in place for a decade, yet it is still suffering from "fundamental flaws" which will "impact reliability." That's enough time to make a judgment on the market, and based on recent comments from the thought leaders of asset owners, the PJM capacity market is a failure.

Texas should avoid copying a failed policy, and focus on policies that align rewards with investor risk, and incentivize plant availability when such assets are most needed, such as the energy-only market with efficient scarcity pricing.