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Brattle Faults Current RPM Minimum Offer Price Rule
August 18, 2011
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Current Minimum Offer Price Rules (MOPR) in PJM's capacity market, "may undermine bilateral long-term contracting, self supply, and force some entities [to] switch to FRR [Fixed Resource Requirement] inefficiently," the Brattle Group said in an updated study on the Reliability Pricing Model.
While Brattle said that wholesale markets need to be protected from manipulation, Brattle shockingly concluded that in a competitive market, "even low offers may be competitive."
Brattle noted that a developer might offer below the Net CONE (Cost of New Entry) value if anticipating rising spark spreads (relative to 3-year historic average), rising future equipment costs, or faced with expiring options. Resources with additional revenue sources (e.g., renewables or cogeneration) may also offer below net CONE.
Furthermore, Brattle noted that the risk of not clearing due to the buyer-side mitigation rules and minimum offer price creates uncertainty for contracting and self-supply.
"Resources will rationally offer into RPM as a price taker if the development of the resource is already committed and not contingent on the auction outcome," Brattle noted.
However, the MOPR, "may prevent clearing, requiring double procurement."
While some might argue that such a resource is uneconomic and should not be developed if it does not clear in the RPM auction, the, "lack of perfect information and foresight will result in some resources being planned or contracts being signed at prices that turn out to be above market," Brattle noted.
"It would be unrealistic to expect market participants to perfectly forecast uncertain annual capacity prices. (Unpredictability is a principal reason to sign long-term contracts!)," Brattle said.
Brattle recommended that PJM consider exempting from buyer-side mitigation certain types of offers, including:
- New generation units that have won a competitive, non-discriminatory RFP open to new and existing resources
- Self-supply resources offered into RPM by vertically-integrated LSEs if the resource is the result of a deliberative planning process and the LSE is not substantially net short in RPM
- Any other resource offers by entities if they (and/or their contractual counterparties or constituents can) verify that they are not substantially net short in RPM (and, thus, would not benefit from suppression of RPM capacity prices)
Despite these criticisms of the current MOPR rules, Brattle generally endorsed RPM's current market design.
In particular, Brattle said that locational resource adequacy has been achieved with lower-cost resources due to RPM. Unfortunately, this is meaningless to customers, whose bills are comprised of full requirements service (energy, capacity, ancillaries). While RPM may clear those resources with the lowest going-forward fixed costs, this has little net impact on retail electric rates paid by customers if the result of the auction is the maintenance of fully depreciated former incumbent assets with very high marginal costs which result in higher energy prices (and resulting retail rates) versus the lower energy prices which would be offered by more efficient new resources, with admittedly higher up-front capacity costs.
Furthermore, responding to criticisms regarding the lack of new generation, Brattle said that, "[a]dditional new generation was not needed for resource adequacy and would have been uneconomic at prices observed to date."
Again, this ignores the fundamental point of the competitive wholesale market, which should be to encourage competition and new entry to lower total energy costs, not solely for resource adequacy. Just because a new resource was not needed for "resource adequacy" does not mean, in a true competitive market driven by the interaction of buyers and sellers, that such a new resource would not have been procured by buyers (but for the administrative capacity market design discriminating against new resources), because such a new resource would have lowered total energy costs despite higher capacity costs.
Finally, Brattle makes much of the 4.8 GW of new generation added under RPM, but considering the length of time RPM has been in place, and that 4.8 GW works out less than 5 baseload plants (and barely 3 depending on size), the amount seems trivial. Brattle also does not break out the 4.8 GW by generation type (baseload, peaking, etc.) or by fuel. The fact is RPM has failed to support any significant new baseload generation.
Furthermore, new generation was outpaced by 5.0 GW of retirements.
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