PJM Capacity Repricing Market Design Initiatives

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3 October 2017 PJM Capacity Repricing Market Design Initiatives Organization of PJM States, 13th Annual Meeting Crystal City, VA David Littell

1 3 October 2017 PJM Capacity Repricing Market Design Initiatives Organization of PJM States, 13th Annual Meeting Crystal City, VA David Littell Principal The Regulatory Assistance Project (RAP) 550 Forest Avenue, Suite 203 Portland, Maine United States raponline.org

2 1 Energy Prices Where are we on prices? Do we really know?

3 Figure 3. Average PJM Aggregate Real-Time Generation Supply Curves in summer 2015 and , 6 Source: PJM, Energy Price Formation and Valuing Flexibility (June 2017) Regulatory Assistance Project (RAP) 3

4 Power System Prices on U.S. West Coast With Seasonal Hydro Flows Regulatory Assistance Project (RAP) 4

5 Historic Natural Gas Wellhead Price Projections (in color each year) and Actual (in black) Regulatory Assistance Project (RAP) 5

6 2 Price Formation: The Energy Landscape is Changing

7 Energy Market Bias? Energy Market or Capacity Market or both? Toward lower cost resources? (PJM) Or towards acquisition of excessive capacity and wrong types of capacities? Secondary auction for transfer of capacity between retiring and RE resources (ISO-NE) Two-stage capacity market to remove subsidized resources from setting quantity or price (PJM) Regulatory Assistance Project (RAP) 7

8 Why are prices so low? (It s not that complicated) Surplus with installed nameplate capacities and with 20% credit for wind, 0% for solar Regulatory Assistance Project (RAP) 8

9 Overcapacity abounds Source: NERC Regulatory Assistance Project (RAP) 9

10 PJM: capacity meets ICAP before DR and EE is counted Source: Brattle Group Source: Brattle Group Regulatory Assistance Project (RAP) 10

11 Robustness to Alternate Futures & Assumption of Risk as between Consumers and Market Participants In an energy only market, high penetration of zero or low-marginal cost generation might not signal future scarcity and could misrepresent the returns and level of risk associated with new investment. On the other hand, the cost of capital and inherent preference for smaller projects with shorter construction periods [in a energy market] suggests the energy-only market might be more robust to alternative futures than one that locked in large scale investments. Source: Bielen, Burtraw, Palmer, Steinberg. The Future of Power Markets in a Low Marginal Cost World, RFF, Sept. 2017, draft manuscript, p.14 Regulatory Assistance Project (RAP) 11

12 Price formation in new energy landscape Is this only a wholesale market design question? How can locational prices better reflect system conditions and value resources needed to meet changing system conditions throughout the day? (PJM) Source: PJM, Energy Price Formation and Valuing Flexibility (June 2017) Regulatory Assistance Project (RAP) 12

13 Pricing to consumers Retail and rate design How can consumer prices of service -- total service including generation, distribution, transmission and supply-side services -- reflect the temporal and geographic variation in costs of service and supply. Why focus only on prices? Too supply oriented. Why not enable demand-management? Regulatory Assistance Project (RAP) 13

14 3 What Capacity is Needed for a Modern Grid? Fundamentals are Changing Regulatory Assistance Project (RAP)

15 What capacity is needed? Energy Services Quality where? when? dispatchable? variable? risks? *wholesale/ retail delivery? reserves? frequency? voltage? ramp rate? *for, from, or to consumers, LSEs, utilities? supply? less demand? carbon? jobs? risks? *enable customers as resources? Regulatory Assistance Project (RAP) 15

16 Bigger, faster markets Source: National Renewable Energy Laboratory (U.S.), 2013 Regulatory Assistance Project (RAP) 16

17 Generation: Just one piece of the puzzle Source: IEA Energy Technology Perspectives 2014 Regulatory Assistance Project (RAP) 17

18 62% Capacity (MWh) Capacity (MWh) 96% 11% 39% 2% 4% Regulatory Assistance Project (RAP) 18

19 Or you can try to do it yourself but a capacity market won t cut it Source: EirGrid Regulatory Assistance Project (RAP) 19

20 About RAP The Regulatory Assistance Project (RAP) is an independent, non-partisan, non-governmental organization dedicated to accelerating the transition to a clean, reliable, and efficient energy future. Learn more about our work at raponline.org David Littell Principal The Regulatory Assistance Project (RAP) 550 Forest Avenue, Suite 203 Portland, Maine United States dlittell@raponline.org raponline.org

Power Markets in an Era of Low-Marginal Costs

14 September 2017 Power Markets in an Era of Low-Marginal Costs Resources for the Future and NREL Workshop David Littell Principal The Regulatory Assistance Project (RAP) 550 Forest Avenue, Suite 203 Portland,