PJM looks at itself alongside regulated utility markets

PJM Interconnection has issued a new report that seeks to evaluate how PJM’s market design fares in “picking winners and losers” in power generation within a region that includes 13 states and the District of Columbia.

The May 5 “Resource Investment in Competitive Markets” paper was developed to help policymakers, PJM members and other stakeholders understand the value markets provide and appreciate trade-offs in market efficiency that may result from potential public policy decisions.

PJM Senior Vice President and General Counsel Vincent Duane said the 52-page report largely rebuts the notion that PJM is forcing out of business “legacy” power plants that would otherwise continue operating for many years to come. 

The in-house PJM report sought to determine “whether we were prematurely retiring or forcing the retirement of legacy resources that still have a useful life,” Duane said.

This is a frequent criticism of PJM and other organized markets by owners of large baseload coal and nuclear power plants.

“Both regulated models and PJM are doing a pretty good job of exiting coal resources that were no longer competitive,” Duane said. But PJM found no evidence that competitive resources were being forced out.

“I think we were able to rebut some of the allegations that were charged against the PJM market,” Duane said.

The report looked at PJM and traditional regulated electric utility markets like Virginia and Florida. The PJM staff report looked at issues such as plant retirements due to environmental standards and incorporation of new units such as combined-cycle gas plants.

Both PJM and regulated utility models are doing well in attracting new natural gas generation, although in PJM the risk is borne by plant developers rather than ratepayers, Duane said.

The paper was developed by a team of PJM thought-leaders, economists, analysts and industry experts.

The analysis shows that markets are providing adequate returns to incent new generation investment and that returns for investors in regulated generation are notably higher than the risk models predict, given the lower risks they face.

Other key findings are:

•Markets provide a transparent environment that allows any project or technology to demonstrate its value to the customer and to flourish or fail based on its merit.

•PJM’s markets are producing prices that efficiently and reliably signal the entry of efficient, new resources and the exit of older, uneconomic resources.

•No evidence suggests that older but economically viable resources are not being adequately compensated or are forced to retire prematurely.

•When pursuing other social or environmental public policy objectives, policymakers must weigh the trade-offs of taking actions that defeat efficient market outcomes.

“Although PJM markets excel at handling a changing resource mix, our continuing ability to rely on market forces to do so is threatened,” PJM President and CEO Andrew Ott.

“The possibility of actions to promote other policy interests can distort wholesale market price outcomes and threaten the ability of markets to efficiently assure resource adequacy,” Ott said.

The report is divided into two sections.

Part 1 examines how markets drive resource investment decisions and compares generation entry and exit outcomes under both market and traditionally regulated constructs. The findings show markets do produce efficiencies when left to manage resource entry and exit.

Part 2 explores subsidies, regulations, policies and other requirements that may either reward or disadvantage generating resources and how such actions affect the performance of markets. This discussion concludes that the value proposition revealed in Part 1 can be devalued or lost altogether unless coherent public policies are pursued.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.