posted on Monday, April 24, 2006 11:18 AM by Gunnar Birgisson

FERC Takes First Step of Many in PJM Capacity Market Makeover

More than eight months after PJM proposed to replace its existing installed capacity (ICAP) requirement with a Reliability Pricing Model (RPM), FERC agreed with the RTO that the current model is an unjust and unreasonable, and fails to induce needed generation investment.  But did it also embrace RPM?  Not likely.  Instead the agency decided to mull over RPM for yet more months together with more public comment and conferences, with no end in sight. 

PJM’s existing ICAP market does not distinguish between the value of generators located in constrained areas and elsewhere, and does not require forward procurement of capacity.  FERC agreed with PJM that its ICAP rules do not support continued entry of new generation, because a generator could not expect to recover its costs through capacity and energy market revenues.  While FERC endorsed numerous features of RPM, it stated it could not at this time determine that RPM was a just and reasonable substitute for the current rules.  Instead, FERC drew up the next procedural steps, including a paper hearing and a technical conference. 

The paper hearing will address how to:  

  • delineate locational capacity markets that capture the operational characteristics of the PJM system,
  • determine the duration of capacity commitments, which FERC agreed should be committed four years in advance,  
  • integrate generation, demand response, and transmission solutions,
  • design the downward-sloping demand curve used in the capacity auction, as well as details regarding the alternative method FERC approved, setting fixed capacity requirements for load servers, and
  • coordinate the capacity and energy markets.

PJM is to provide its views on these questions by May 19, 2006.  Public comments responding to PJM are due June 2, with reply comments scheduled for June 16.  The issues to be addressed at the technical conference include the shape of the demand curve and the alternative long-term fixed resource requirement option. 

Several other organized markets have grappled with how to induce sufficient generating capacity.  The New York ISO was the first to price capacity locationally on a downward-sloping demand curve.  ISO-NE’s comparable proposal provoked a backlash from representatives of capacity deficient areas, primarily in Connecticut, and were ultimately diluted into a pending forward capacity market proposal.  In the west,  CAISO is struggling with these same issues as part of its Market Redesign and Technology Upgrade.  Meanwhile, Midwest ISO so far has stuck with the simplest solution ― no capacity market at all.