Preliminary PJM Staff Recommendation Would Allow Generators to Earn Energy Market Windfalls Without Depressing Capacity Price

Under a preliminary PJM Staff recommendation concerning "reforms" to the capacity market, PJM would allow generators to earn windfall energy market revenues without such revenues being used to offset the compensation required from the capacity market.

That is because the preliminary Staff recommendation calls for development on a "forward-looking" Energy and Ancillary Services (E&AS) Revenue Offset, rather than reliance on historic results.

The E&AS, which of course is not unit-specific clawback of energy market revenues but is only an adjustment to gross Cost of New Entry, is meant to recognize that as generators earn more in the energy market, they recover additional fixed costs, and therefore support from the capacity market is not needed as greatly as if the generators had not received the energy market revenues.

The PJM Staff preliminary recommendation states that, "[o]utliers and disruptions in normal trends, as could be seen with the most recent winter, should not be included in E&AS calculation."

Essentially, under this rationale, when generators do earn a windfall from excessive energy prices, capacity prices should not be mitigated in any way in recognition of the additional margin earned by generators.

"The impacts of such abnormalities can be mitigated by switching from a historical actual to a forward-looking methodology [for the E&AS offset," the PJM Staff preliminary recommendation states

Brattle had proposed a forward-looking E&AS offset.

Click here for PJM Staff's full preliminary recommendations for capacity market changes

Also notable is that under the preliminary recommendations, PJM Staff is not recommending separate demand curves for each local capacity zone.