I've been following the story of PJM's new capacity import limit via RTO Insider over the past couple months. Last Friday, PJM made its filing with FERC to change an agreement and tariff to impose the new limits before the next base residual auction.
It seems there is a B-I-G problem with low capacity prices. In addition to causing havoc with incumbent generator profits, PJM has come up with other reasons to "fix" its capacity market.
First though, let's look at how PJM's capacity market works. Capacity is a generator's ability to produce electricity. This is unrelated to energy actually produced in real time. Because PJM has to make sure there is enough electricity available to meet peak demand every year, it secures capacity, or the ability to produce electricity, three years in advance. Generators submit capacity bids in the auction. PJM stacks the bids by price. Beginning with the lowest price, bids are accepted until the capacity target is met. The highest price accepted is the uniform capacity price paid to all generators whose bid cleared.
Now let's move on to imported capacity. Generators outside PJM have been bidding higher and higher amounts of generation into PJM's auction, often at low prices. PJM's rules have allowed imported capacity into the auction even though it has no firm transmission path to be used by load in PJM. This sets up a scenario where PJM has cleared capacity that may never be delivered. The effect of this is that PJM may not have enough capacity to serve peak load. It also creates an effect where it can lower capacity prices for other generators in PJM because acceptance of low bids of imported capacity lowers the high bid that sets the capacity price for all generators.
So, on the one hand, it's a reliability problem, but it's also an earnings problem for PJM incumbent generators. PJM believes that artificially lowered capacity prices created by generation that may never serve PJM load is also causing retirement of existing generators in PJM, as well as preventing new internal generation from being built. PJM's market is supposed to encourage new generation to develop when capacity prices are high, adding more supply to meet demand. Instead, it was getting fake bids from outside the region, and that has skewed capacity prices.
Maybe generation from other regions can supply PJM cheaper than existing internal generation, but who wants to rely on generators thousands of miles away to supply their electricity? The longer electricity has to travel between generator and user, the more unreliable the supply becomes and the more electricity is simply wasted by losses along the way. It's encouraging that PJM finally acknowledges these simple physics of electric transmission, but the challenge now is to see if this new found realization is going to have any effect on the midwest wind transmission gold rush.
PJM's new rules make an exception for any external generator with firm transmission service that can be controlled by PJM and agrees to PJM's "must offer" requirement. This still allows external generators like the hated Clean Line Energy to be excepted from the limit. However, Clean Line only has 700 MW of firm transmission service for one of its lines with a capacity of 3500 MW. This still doesn't make Clean Line imports any more reliable than other imports though, nor does it provide this merchant transmission company with any of the east coast customers forced to buy renewables at any price that it seeks.
Let's keep an eye on this one and see who intervenes and complains at FERC (Docket No. ER14-503).
It seems there is a B-I-G problem with low capacity prices. In addition to causing havoc with incumbent generator profits, PJM has come up with other reasons to "fix" its capacity market.
First though, let's look at how PJM's capacity market works. Capacity is a generator's ability to produce electricity. This is unrelated to energy actually produced in real time. Because PJM has to make sure there is enough electricity available to meet peak demand every year, it secures capacity, or the ability to produce electricity, three years in advance. Generators submit capacity bids in the auction. PJM stacks the bids by price. Beginning with the lowest price, bids are accepted until the capacity target is met. The highest price accepted is the uniform capacity price paid to all generators whose bid cleared.
Now let's move on to imported capacity. Generators outside PJM have been bidding higher and higher amounts of generation into PJM's auction, often at low prices. PJM's rules have allowed imported capacity into the auction even though it has no firm transmission path to be used by load in PJM. This sets up a scenario where PJM has cleared capacity that may never be delivered. The effect of this is that PJM may not have enough capacity to serve peak load. It also creates an effect where it can lower capacity prices for other generators in PJM because acceptance of low bids of imported capacity lowers the high bid that sets the capacity price for all generators.
So, on the one hand, it's a reliability problem, but it's also an earnings problem for PJM incumbent generators. PJM believes that artificially lowered capacity prices created by generation that may never serve PJM load is also causing retirement of existing generators in PJM, as well as preventing new internal generation from being built. PJM's market is supposed to encourage new generation to develop when capacity prices are high, adding more supply to meet demand. Instead, it was getting fake bids from outside the region, and that has skewed capacity prices.
Maybe generation from other regions can supply PJM cheaper than existing internal generation, but who wants to rely on generators thousands of miles away to supply their electricity? The longer electricity has to travel between generator and user, the more unreliable the supply becomes and the more electricity is simply wasted by losses along the way. It's encouraging that PJM finally acknowledges these simple physics of electric transmission, but the challenge now is to see if this new found realization is going to have any effect on the midwest wind transmission gold rush.
PJM's new rules make an exception for any external generator with firm transmission service that can be controlled by PJM and agrees to PJM's "must offer" requirement. This still allows external generators like the hated Clean Line Energy to be excepted from the limit. However, Clean Line only has 700 MW of firm transmission service for one of its lines with a capacity of 3500 MW. This still doesn't make Clean Line imports any more reliable than other imports though, nor does it provide this merchant transmission company with any of the east coast customers forced to buy renewables at any price that it seeks.
Let's keep an eye on this one and see who intervenes and complains at FERC (Docket No. ER14-503).
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