PJM Says Capacity Performance Proposal Will Aid Retail Suppliers -- Don’t Believe Them
May 01,2015
During yesterday's National Energy Marketers Association National Restructuring conference, PJM Executive Vice President for Markets Andrew Ott, who will take over as PJM CEO in the coming months, told retail suppliers that they will benefit from PJM's capacity performance proposal.
Retail suppliers shouldn't buy this pitch, because, at best, it's a Hobson's choice.
Specifically, Ott said that retail suppliers will benefit because the risk of generator non-performance will no longer be shifted to LSEs. As generators will be incented to perform, out-of-market actions to maintain reliability will be reduced, reducing the need for unhedgeable uplift assigned to retail suppliers, PJM reasons.
PJM's capacity performance proposal will bring "stability" to the market, Ott said, benefiting retail suppliers and instilling "confidence" in prices.
Ott conceded that capacity performance will result in higher prices, but indicated such prices were an acceptable tradeoff for the reduced risk and stability benefits.
While not discussing specific costs at NEM, PJM has previously forecast gross incremental capacity costs under capacity performance as up to $5 billion annually. Though PJM has said such gross costs will be ameliorated by lower energy market costs, unless PJM is guaranteeing such lower energy market costs (which they aren't), such forecasts should be taken with a grain of salt. Especially considering that the $1,000 energy market price cap may be changed in the future.
What PJM has essentially presented to retail suppliers is a Hobson's choice: either accept huge premiums in capacity prices, or live with crippling uplift.
So much for markets.
Yes, uplift is devastating to retail suppliers due to its unhedgeable nature. But that doesn't mean retail suppliers and their customers should be expected to accept another excruciating $5 billion burden just to avoid uplift.
After all, uplift resulted from a variety of causes, and a number of measures have been taken to reduce uplift. Capacity performance is just one approach that could reduce uplift, but it should not be presented as the only solution which retail suppliers must prostrate themselves to in order to escape uplift.
Moreover, PJM's creditability has been damaged by its sudden turn-around on the capacity market.
We've heard the "stability" argument before.
The original capacity market design -- which PJM defended for years in the face of the very criticism it is now seeking to address via capacity performance -- was said to be beneficial to retail suppliers because it would eliminate volatility and bring stability to the markets
Guess what.
It didn't.
It failed.
Indeed, the capacity market was hailed as a market-breakthrough that would end similarly unhedgeable Reliability Must-Run contracts which exposed retail suppliers to volatile and unknown costs.
While RMR contracts were initially pushed out by RPM (though RMR contracts have made a comeback), failings in the PJM capacity market design only led to different types of uplift and unhedgeable costs (on top of billions in new capacity costs)
Retail suppliers should not expect capacity performance to wind up any differently.