PJM Posts Updated Capacity Market Repricing Proposal, Previews Energy Market Price Formation Paper
PJM has posted an updated Capacity Market Repricing Proposal and previewed an Energy Market Price Formation Working Paper that is to be released June 15
The Capacity Market Repricing Proposal (see details in the working paper here) would address subsidies in the capacity market by administratively adjusting subsidized resource offers to prevent capacity price distortion, and would include a two-stage capacity auction. The Capacity Market Repricing Proposal updates PJM’s Potential Alternative Approach to Expanding the Minimum Offer Price Rule to Existing Resources proposal from August 2016
PJM also previewed details on a forthcoming working paper on Energy Market Price Formation to be released June 15. Noting several observations concerning the energy market as a result of industry trends, the preview states, "These shifts in economic trends and market dynamics could lead to an unintended bias in the energy markets favoring lower capital cost resources. The concern is that this phenomenon is driven, in part, by current energy pricing mechanisms failing to signal the true, full cost incurred to meet the marginal increment of load."
"Although this issue is not new, its impact on energy prices is exacerbated by flattening supply curves and low demand, which put financial stress on all units, but particularly large units with high capital costs," the preview states
The price formation proposal does not respond per se to state subsidy programs. "Instead, it examines whether the aforementioned profound changes to the industry require re-examination of PJM rules that define when and under what circumstances a generator is eligible to set marginal prices. The hypothesis is that the correct energy price in some intervals is understated by operation of rules that disqualify inflexible generation from setting price, even when such generation is needed and economic in that given interval. If this hypothesis is accurate, the pricing problem does not arise because subsidies have distorted prices. Rather, state programs, to some extent, may be a response to organic deficiencies in market design. Getting the market design 'right' from the standpoint of price formation – which is justified on its own merits – may have the secondary effect of reducing forces motivating subsidy programs," PJM said on the working paper