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Why Capacity Performance Isn't Good for the Markets

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It’s no secret that Direct Energy believes that PJM’s Capacity Performance market structure, approved by FERC, is both over-priced and unlikely to achieve its intended results. In this op-ed piece, we explain why.

PJM’s Reliability Pricing Model was not designed to deal with winter peaks and the reliance on Marcellus shale gas. Nor did the RPM specifically target nuclear, coal and inefficient units for extra revenue.

Need for Comprehensive Overhaul

Instead of doing a comprehensive overhaul, and without much of a stakeholder process, PJM tried to Band-Aid the RPM and developed the CP structure in about four months.

This Band-Aid seems targeted less toward fixing an unreliable system and more to increasing revenues for certain generators. Otherwise why would FERC have exempted fixed resource requirement entities from having to make their system as reliable as the rest of PJM?

Direct Energy protested the CP transition auctions for several reasons.

Generators had already taken measures to improve their performance after the polar vortex.

PJM required consumers to fund a new winter testing program that allowed many generators to have “trial” runs so that there were far fewer operational challenges for units that had not been run in a while.

Generators themselves publicly reported making greater investments because the costs of non-performance during the polar vortex were so high.

And the transition money is unlikely to contribute to better performance during their three-year periods: nuclear units will still incur unanticipated forced outages, and gas generators will unlikely be able to firm up their fuel as few units have permits that allow dual fuel and burning of oil, or they lack space to install storage.

Moreover, payments are not high enough to allow generators to purchase firm gas supply. DE also protested the method by which the auctions were being cleared, because there were two ways to do it and PJM chose the more expensive way.

That is now all history. But our concerns continue.

Illusory Insurance?

Consumers are paying for what may very well be an illusory insurance policy. First, there is no guarantee that a polar vortex event will occur again. Consumers would be better off paying higher real-time energy prices when the system is stressed than doling out billions of dollars annually for an event that may not occur.

And even if it does, there is no guarantee that the generation will be there physically. As noted above, many generators cannot invest in dual fuel or storage facilities, and payments are not significant enough to fund new pipelines to procure firm transmission. Even if the payments were sufficient, unless generators enter into the gas markets during timely nomination periods, they cannot procure firm gas.

We believe that prudent generators are not going to invest more money into their facilities but are more likely to seek financial hedges to cover non-performance risk. So at the end of the day, physical performance is no more guaranteed under CP than it was under the RPM.

Moreover, we are now more than ever dependent on fewer generators to achieve reliability. There are numerous resources that could run for short periods of time, or during one season, that are no longer eligible to be providers of capacity.

This simply makes no sense: There is no reason why there cannot be differing payment structures for capacity. PJM says all megawatts are equal; but they already gave up on that concept when they introduced differing payment structures for demand response (which is a very valuable reliability tool in the wholesale markets that we hope the Supreme Court will recognize) and ran the transition auctions using two different products and clearing curves.

Diverse Resources

There is no reason why the RPM could not have been expanded to include more diverse resources and less expensive ones to help achieve system reliability.

The bottom line is that we strongly support the principles that generators should receive just and reasonable compensation for their performance, but that compensation should be commensurate with the benefits a unit provides to the system. Consumers have been asked to foot an extraordinarily high insurance bill that the chief regulator, FERC, admits is not based on any kind of consumer analysis or even comparative analysis of what is the most efficient way to achieve stated reliability goals.

This is the saddest part of our regulatory system today.

And we need to find a way to fix it. Somewhere in the calculus of how to run good markets, there needs to be an assessment of whether there is a more efficient way to get the same or similar benefits.

Marji Rosenbluth Philips is director of RTO and federal services for Direct Energy, one of the largest retail providers of electricity and natural gas in North America.

This article was first published by RTO Insider. You can read the original piece here

Posted: October 07, 2015