Energy

New Model Capacity Markets Expected to Drive Operational Excellence

New Model Capacity Markets Expected to Drive Operational Excellence

PJM’s “pay for performance” Reliability Pricing Model (RPM) capacity market is expected to drive operational excellence from traditional fossil fuel generators. FERC’s Order 745 being upheld in the courts earlier this year and puts the demand response (DR) at the forefront of capacity market model changes. FERC 745 will provide demand response participants the opportunity to participate in capacity markets and receive capacity payments on an equal level playing field with generators. This ruling should have some independent power producers and traditional utility generators concerned.

PJM’s “pay for performance” Reliability Pricing Model (RPM) capacity market is expected to drive operational excellence from traditional fossil fuel generators.  FERC’s Order 745 being upheld in the courts earlier this year and puts the demand response (DR) at the forefront of capacity market model changes. FERC 745 will provide demand response participants the opportunity to participate in capacity markets and receive capacity payments on an equal level playing field with generators. This ruling should have some independent power producers and traditional utility generators concerned.

FERC 745 is expected to attract significantly more DR participation in the coming years. DR in PJM’s most recent (RPM) capacity auction accounted for approximately 11,000 MW of resources that are committed in the 2018/2019 delivery year. This is equivalent to approximately 7% of the total base residual capacity committed in the auction. The expectation is that DR participation will experience growth in the coming years as electric consumers take advantage of being incentivized with capacity payments when reducing load during peak times. Capacity payments to DR participants will have equal value to capacity payments made to generators for having their supply available when resources are tight. These payments at wholesale rates will look very attractive to both residential and commercial customers.

The PJM RPM capacity market will penalize generators that underperform, while it will pay generators and incentivize them to be available and capable of running during peak periods. If generating units that have cleared their capacity in an auction are unable to operate and be available with the capability of providing energy when it is most needed, they will be penalized. These potential financial penalties are expected to increase maintenance costs for generators in an effort to clear their capacity and ensure their availability. The new market structure has some market participants skeptical in that the new capacity market design will result in higher wholesale prices along with higher operation and maintenance costs. However, if the new capacity market design creates better reliability and efficiency as intended, the end result will be bearish for PJM wholesale and retail power prices. Lower demand combined with additional efficient generation in the supply stack will lower not only capacity prices in the auctions but also the overall cost of power within PJM.

It will be interesting to see what the next PJM capacity auction results will be later this spring.

To see the entire IDC Energy Insights report click here:  IDC’s Energy Insights Perspective report: New Capacity Markets Drives Operational Excellence.

John Villali is Research Director for IDC Energy Insights. Click here to learn more about research from IDC Energy Insights.

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