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Report: PJM's Capacity Market Results Analyzed; Changes Recommended

The Brattle Group has completed its study of the Reliability Pricing Model (RPM), the capacity market in the PJM Interconnection region. Brattle was commissioned to analyze the first five RPM base residual auctions and assess whether the RPM is achieving its stated intentions and to recommend possible modifications to the RPM. The RPM is meant to ensure that electricity providers have enough capacity to reliably serve the 51 million consumers in the PJM region.

The report, entitled "Review of PJM's Reliability Pricing Model," concludes the following about RPM results to date:

-- The first five base auctions have been successful in achieving the reliability and economic objectives of the RPM as defined in the RPM settlement agreement reached in September 2006.

-- The RPM has attracted and retained more than 14,500 megawatts (MW) of resources that likely would not have been available otherwise. These resources include new generation, up-rates to existing generation, new demand response, decreases in committed net exports, withdrawn requests to deactivate plants, and cancelled or deferred retirements of generating plants.

-- The RPM has helped stimulate the proposed construction of numerous new generation projects, of which approximately 33,000 MW are already eligible to offer into future RTO auctions.

-- The RPM also assists in retaining more than 20,000 MW of existing resources that likely would not be financially-viable in the absence of capacity prices.

Johannes Pfeifenberger, a principal of The Brattle Group and coauthor of the report, comments that "RPM's performance has been impressive in terms of attracting new resources and retaining existing resources. These resource commitments satisfy reliability requirements on both a pool-wide and a locational basis. Nevertheless, our review also identified a number of concerns and we have developed recommendations that we believe would help to increase the effectiveness and efficiency of the RPM."

The report calls for maintaining the basic design elements of the RPM but recommends that PJM and its stakeholders consider various changes including:

-- Changing certain market rules and design elements to increase the pool of resources able to offer capacity into the RPM, for example by allowing energy efficiency and price-responsive demand resources to be reflected in the RPM on a more timely basis.

-- Revising penalties imposed on electricity providers that do not fulfill their capacity commitments.

-- Improving processes to maintain and cost-effectively provide reliability in areas with transmission constraints (locational deliverability areas).

-- Redesigning incremental auctions to make them more liquid and able to address decreases in load and changes in transmission limits into local areas (locational deliverability areas).

-- Changing how capital expenditures may be included in suppliers' offers.

-- Reevaluating reliability targets and improvements to the processes used to determine the "net cost of new entry," both of which affect the demand and price for capacity.

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