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PJM Capacity Market "Doesn't Work," Duke's Trent Tells Ohioans
September 22, 2011
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"The short term capacity market doesn't work," Keith Trent, Group Executive and President of Commercial Businesses for Duke Energy, observed during the Ohio Governor's 21st Century Energy & Economic Summit yesterday.
The Reliability Pricing Model, "hasn't worked, the facts show," Trent said, citing the recent Brattle report on RPM.
As noted by Matters (8/18), the Brattle report found that from the 2006 start of the capacity market through 2010, a total of 4.8 GW was built in PJM.
"Of that amount, there was not a single coal, nuclear or natural gas plant that was built based on the capacity market," Trent said. One gas-fired facility was built in Virginia under rate of return regulation.
The story is the same in Ohio, Trent added, as the state has seen no new nuclear, coal, or gas-fired generation since RPM.
Additionally, Trent noted that even Brattle, which generally endorsed RPM, said that it was, "too early to tell how well RPM ... will mitigate retirement threats caused by the full slate of new [EPA] regulations planned to take effect between 2015 and 2018."
That "just doesn't cut it," Trent said, in support of Duke Energy Ohio's proposal to assume the capacity obligation of all distribution customers in its service area, with owned generation, removing capacity as a bypassable component of the bill and relieving retail suppliers from meeting a capacity obligation.
Anthony Alexander, President and CEO of FirstEnergy Corp., disputed Trent's conclusions, but the data he cited merely shows that generation construction was more than sufficient without the forward capacity market, and that a forward obligation on load isn't needed.
Specifically, Alexander said that in 1990, Ohio imported 20% of its power, and now that figure is down to 10%. Furthermore, since the early 1990s, none of the investor-owned utilities in Ohio have built generation, meaning all of the new capacity responsible for decreasing imports has been built by the competitive market.
However, Alexander did not specifically dispute the lack of new generation in Ohio since the start of RPM, and it appears much, if not all, of the new generation accounting for Ohio's reduced imports was built in the pre-RPM era.
Accordingly, it appears generation investment in Ohio has regressed under RPM, which is not surprising given that the PJM market design which splits full requirements electricity into (among other things) energy and capacity favors largely depreciated assets with lower capacity costs versus new development with higher upfront costs, and inhibits the development of newer, more efficient units with lower energy costs due to their inability to initially clear the artificial RPM construct which looks at only one portion of these plants' costs.
Alexander said that Ohio should, "allow the markets to work" -- an ironic statement seeing how RPM was an intervention into a functioning market which, rather than allowing supply and demand forces to work naturally, mandates that load purchase on a forward basis a government-prescribed amount of capacity.
Alexander further said that Ohio should, "depend on and rely on what's really made this country great, and that is competitive spirit -- people willing to take risk, people willing to take that step that will improve their potential as a company."
But it was generators, and their investors, who were unwilling to take risk under the pre-RPM PJM market design, and instead of competing in a market, ran to federal regulators to mandate that customers purchase their capacity three years in advance, shifting this risk back onto consumers.
Alexander said that proposals such as that from Duke Energy Ohio for the utility to meet the capacity obligation will result in construction of capacity that customers "may or may not need." Again, this is no different from the current RPM design where the mandated downward sloping demand curve intrinsically procures more capacity than needed.
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