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Cost Impact of PJM Capacity Performance Pegged at $7.3 Billion

October 14, 2015 By Cheryl Kaften

A report released by the American Public Power Association (APPA) on October 8 estimates that the cost impact on consumers of PJM Interconnection’s recent Capacity Performance (CP) changes to its Reliability Pricing Model (RPM) will be $7.3 billion over the course of the next three delivery years – 2016/17, 2017/18, and 2018/19 –with some further impact in the future.

The study, entitled “PJM’s ‘Capacity Performance’ Tariff Changes: Estimated Impact on the Cost of Capacity,” was commissioned by APPA – an organization that advocates on behalf of 2,000 community owned electric utilities – and was conducted by Wilson Energy Economics.

Based on the findings, the association contends that the new auction rules impose greater costs and risks on capacity providers – encouraging many of them to offer capacity at higher prices. Specifically, the additional market capacity cost is estimated by the researchers to be $2.3 billion, $1.7 billion, and $3.3 billion for the 2016/17, 2017/18, and 2018/19 delivery years, respectively.

For the 2016/17 and 2017/18 delivery years, special “transition” auctions recently have been held. All of the cost of the commitments resulting from these transition auctions, net of the cost of the terminated prior RPM commitments, is considered a cost of the CP implementation for purposes of the study.

For the 2018/19 delivery year, an RPM Base residual auction recently was held, through which PJM acquired the new CP product to meet 80 percent of the reliability requirement, with the remainder satisfied with non-CP or “Base” resources. The report estimates that the auction, which cleared at $164.77/MW-day, would have cleared at $124.23/MW-day, “but for” Capacity Performance. Using this estimated clearing price, the total market capacity cost would have been $3.3 billion less than the $10.9 billion in market capacity cost that resulted from the auction, the study found.

The next Base residual auction, for the 2019/20 delivery year, would again allow the Base capacity resources to participate, but the quantity would be reduced to a maximum of 10 percent of the reliability requirement (compared to 20 percent for 2018/19). The additional cost due to CP for that delivery year might be higher than the estimated additional cost for 2018/19, due to the further reduction in Base product, APPA contends.

For the following delivery year, 2020/2021, the Base product is to be eliminated and the entire reliability requirement satisfied with CP resources – which could potentially result in another large increase in the clearing prices and costs due to CP. Estimates of the potential impacts of CP beyond 2018/19 have not been produced.

With respect to energy costs, improved generator performance certainly would have resulted in much lower energy costs during the “Polar Vortex” period of extreme cold in early 2014, when very high forced outage rates caused price spikes in the PJM energy markets, APPA said in its report. However, APPA stated, many of the performance issues had been resolved by the winter of 2015, as a result of numerous steps taken by market participants and PJM following the Polar Vortex events (and well before Capacity Performance was approved or implemented).

Thus, according to APPA, the costs of CP are high and the prospective benefits are low – or at least, debatable. “PJM’s recent changes are an over-reaction to the ‘Polar Vortex,’ and address a problem that was largely already addressed by PJM and market participants through various other measures,” states APPA Senior Vice President of Regulatory Affairs and Communications Joe Nipper. “As a result, bill-paying consumers will pay a lot more for the same product.”

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