Brattle Group Study Finds PJM Interconnection's Capacity Market Achieves Its Objectives and Recommends Design Enhancements

CAMBRIDGE, Mass., Aug. 18, 2011 /PRNewswire/ -- Consultants at The Brattle Group have completed a second triennial performance assessment of PJM Interconnection's capacity market, the Reliability Pricing Model (RPM).  Their analysis finds that the market has achieved its design objective of achieving resource adequacy at a price consistent with the supply and demand for capacity. The analysis also identifies some modifications that would help to ensure future resource adequacy and increase market efficiency.

RPM is designed to provide adequate capacity resources to meet regional and local power supply needs, improve price stability compared to the previous capacity market construct, and force existing resources to compete with a potentially large supply of new resources.  

The new study is the second performance assessment of RPM after Brattle's June 2008 review, which documented RPM performance for the first five delivery years.  Since then, three more base auctions have been conducted, with the latest in May 2011 for the 2014/15 delivery year.

Based on a thorough analysis of the auction results and RPM performance, the authors conclude that:

• Without considering territory expansions and Fixed Resource Requirement (FRR) entities not participating in RPM auctions, RPM has been successful in attracting and retaining 28.4 GW of committed gross additions (13.1 GW net of retirements, derates, and other capacity withdrawn from auctions).  This capacity is sufficient to meet or exceed resource adequacy requirements in both the RTO and all of the individual locational deliverability areas (LDAs) at prices consistent with market conditions.
• RPM has reduced system costs by fostering competition among all types of new and existing capacity, including demand-side resources.  It has also facilitated cost-effective tradeoffs among investment in environmental retrofits on aging coal plants, retirements, and replacement with lower-cost resources.
• Several criticisms that have been raised about RPM are contradicted by this analysis –most notably the arguments that RPM prices are too high, that RPM cannot attract new generation, or that RPM cannot maintain reliability in the face of new environmental rules.  

While Brattle's report finds that the RPM is achieving its objectives and recommends maintaining its basic design elements, the report offers recommendations for increasing market transparency and predictability as well as reducing reliability risks going forward.  These recommendations for consideration by PJM and its stakeholders include:

• Increase the stability and transparency of administratively determined parameters, including modeled transmission limits and load forecasts.
• Increase the accuracy of the administrative energy and ancillary services (E&AS) offset calculation to avoid over-stating the parameter relative to the margins actually received by generators.
• Mitigate reliability risk caused by the use of a historic E&AS offset by raising the price cap on the Variable Resource Requirement (VRR) curve, and consider transitioning to a normalized, forward-looking offset.
• Define new LDAs more pro-actively when large amounts of LDA capacity fail to clear a base auction or are otherwise at risk for retirement.
• Maintain the 2.5 percent Short-Term Resource Procurement Target for Limited Summer demand response resources, but eliminate this "holdback" for Annual and Extended Summer resources.
• Develop voluntary centralized auctions or an over-the-counter exchange of longer-term capacity products to facilitate long-term contracting and create forward price transparency.
• Add exemptions to the Minimum Offer Price Rule for offers that can demonstrate that they are based on a non-discriminatory procurement process or do not serve net-short buyers.

The Brattle report also includes updated estimates for the Cost of New Entry (CONE) to inform the definition of the VRR curve and benchmark market mitigation levels.  To develop these estimates, Brattle sub-contracted with the engineering, procurement, and construction contractor CH2M HILL and with operations and maintenance service provider Wood Group.  Updated estimates are slightly lower than the CONE used by PJM in its most recent three-year forward auction, due in part to recent decreases in major equipment and materials costs.

The findings from the forthcoming report, "Second Performance Assessment of PJM's Reliability Pricing Model," were presented today to PJM stakeholders by study authors Johannes Pfeifenberger, Sam Newell, and Kathleen Spees and are available at www.brattle.com.  The full report is scheduled to be published by the end of August.

PJM, a regional transmission organization, ensures the reliability of the high-voltage electric power system and administers a competitive wholesale electricity market in all or parts of 13 states and the District of Columbia.

The Brattle Group has offices in Cambridge, MA; San Francisco, CA; Washington, DC; Brussels; London; and Madrid.  Areas of expertise include antitrust and competition, valuation and damages, utility regulatory policy and ratemaking, and regulation and planning in network industries.  For more information, please visit www.brattle.com.

SOURCE The Brattle Group