PJM Capacity Market. October 5, 2011 OPSI Seventh Annual Meeting Andrew L. Ott, Senior Vice President, Market Services

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1 PJM Capacity Market October 5, 2011 OPSI Seventh Annual Meeting Andrew L. Ott, Senior Vice President, Market Services

2 Capacity vs. Energy Capacity A commitment of a resource to provide energy during PJM emergency. Capacity revenues paid to committed resource whether or not energy is produced by resource. Long-term commitment Daily product Energy Generation of electric power over a period of time Energy revenues paid to resource based on participation in Day-Ahead or Real-Time energy market Daily / hourly commitment Hourly or real-time product $1000 / MWh offer cap Capacity, energy & ancillary services revenues are expected, in the long term, to meet the fixed and variable costs of generation resources to ensure that adequate generation is maintained for reliability of the electric grid. 2

3 Counterintuitive results - prices falling but reliability violations increasing One price does not fit all Not coupled to locational value Not coupled to operational reliability Not coupled to value provided Insufficient information to drive investment Short-term market / limited forward certainty Pre 2005 Capacity Market Issues 3

4 Decreasing Prices / Increasing Generation Retirement Pre-2005 Capacity Market : Significant Concerns 2004/2005 Assessment Decreasing Reserve Margin / Increasing Reliability Violations 4

5 Why is a Resource Adequacy Construct Necessary? Prevents Load Serving Entities from leaning on the system Provides a metric to quantify adequate generation supply Provides demand customers with capability to ensure long-term generation adequacy and short term generation availability to serve load. Provides RTO with call on energy from capacity resources during generation shortage condition. Purpose of resource adequacy is to quantify reliability standards and equitably distribute reliability obligation. 5

6 Why Develop Forward Capacity Market? Provide transparent price signal to quantify cost of reliability requirement in time for actionable response Obtain resource commitments to meet system peak loads three years in the future Align pricing with reliability requirements and promote competition between resource alternatives Provide longer-term price signal and stable revenue stream for generation resources to incent investment where needed. PJM Capacity Market is explicitly designed to provide revenue adequacy and the resultant reliability. 6

7 Stakeholder Consensus for Moving to Forward Capacity Market was Difficult and Required Board / Regulatory Intervention 2004 PJM identified significant projected shortfall in resource adequacy Stakeholders agreed with problem statement Two-year stakeholder debate on solution Lack of consensus PJM Board filed forward capacity solution with Federal Regulator FERC ordered settlement process to finalize solution Forward Capacity Market implemented in

8 PJM Capacity Market PJM Capacity Market 80% 20% Reliability Pricing Model (RPM) PJM secures capacity on behalf of Load Servers to satisfy capacity obligations not satisfied through self-supply. Fixed Resource Requirement Alternative (FRR) (self-supply) Load Server secures capacity to satisfy their load obligation. PJM Capacity Market is designed to ensure adequate availability of resources that can be called upon to ensure the reliability of the electric grid. 8

9 Foundation for RPM Structure RPM Structure Auction Structure Market Power Mitigation Performance Requirements Self-Supply Alternative (FRR Option) Resource Adequacy Requirement Locational Constraints Forward Procurement 9

10 3 Years RPM Structure May Base Residual Auction Sept July 20 months EFORd Fixed 10 months Feb. 3 months June Delivery Year May First Incremental Auction Second Incremental Auction Third Incremental Auction Ongoing Bilateral Market 10

11 Locational Constraints Resources in the unconstrained area can help meet the Reliability Requirement of the constrained area Unconstrained Locational Delivery Area (LDA) RCP = $16.46/MW-day Import Constrained Area RCP = $198.42/ MW-day In the event the import limit is reached, more expensive capacity located within the constrained area needs to be committed to meet the local Reliability Requirement The amount of resources in the unconstrained area that can help meet the constrained area is limited by the actual transfer limit as calculated by PJM Planning Engineers. 11

12 Price = UCAP Price ($/MW-day) 1.5 Net Cone Net Cone 0.2 Net Cone Variable Resource Requirement (VRR) Curve (a) (b) Example Target Level = Reliability Requirement Short Term Resource Procurement Target (c) (IRM 3%) IRM (IRM + 1%) (IRM + 5%) Quantity = UCAP MW A VRR Curve is defined for the PJM Region. Individual VRR Curves are defined for each Constrained LDA. 12

13 Graphical Illustration of Auction Clearing 2012/13 Base Auction VRR Curve Clearing determined by the intersection of the supply and the demand (VRR) curves. 13

14 What Has RPM Done for PJM Region? What has does capacity cost? Prior to RPM, Default capacity rate was $160 per MW-day Prior to market issues identified in , capacity prices annual product were about $100 per MW-day Net Cost of new entry is between $240 - $340 per MW-day Over the eight RPM auctions, the weighted average payment for capacity in PJM was $ per MW-day For comparison purpose, $ $100 * 149,000 MW *365 = $1.23 Billion Incremental Analysis = $1.23 Billion / 31,365 MW = $39,328 per MW Market Monitor reports the 20-year levelized cost of New Resources are*: $131,044 per MW for Gas-fired Combustion Turbine $175,250 per MW for Gas-fired Combined Cycle $ 465,455 per MW for Coal Plant * Source: 2010 State of Market Report issued by independent Market Monitor Incremental Capacity Benefit in PJM region resulting from RPM Source: 2011 Brattle Report Resource Demand Response New Generation Uprated Generation Canceled Retirement Increased Imports Total Amount Cleared 11,799 MW 4,750 MW 4,929 MW 3,262 MW 6,896 MW 31,365 MW RPM has been a lower cost alternative to building new generation to keep the lights on in PJM 14

15 RPM Base Residual Auction Resource Clearing Prices (RCP) 15

16 RPM Performance Assessment Independent Consultant (Brattle Group) - Primary Findings RPM has achieved resource adequacy RPM has attracted and retained sufficient capacity to meet or exceed reliability requirements in the RTO and every LDA Moderate capacity deficits occurred in some LDAs in early years due to pre-rpm conditions, but no shortages anywhere in the last 4 Base Auctions Prices have been consistent with market conditions Lower prices (below Net CONE) under excess supply conditions Higher prices under tighter supply conditions, but still below Net CONE in recent auctions RPM has reduced costs by fostering competition Generally level playing field has reduced costs by attracting investments in lowcost supplies from demand response, efficiency and uprates RPM has enabled cost-effective response to environmental rules Facilitated economically efficient tradeoffs among investment in environmental retrofits, retirement and replacement with lower-cost alternative supplies 16

17 PJM Capacity Market Thank You More information: 17