The 2023/24 Base Residual Auction held by PJM in June yielded competitive results, the RTO’s Independent Market Monitor announced in a report released last month, owing largely to the implementation of a 2021 FERC order reworking the derivation of the market seller offer cap (MSOC).
Monitoring Analytics’ report, released Oct. 28, said the shift from basing the MSOC off the net cost of new entry (CONE) to using the avoidable-cost rate (ACR), as ordered by FERC, addressed concerns about the ability to exercise market power and uncompetitive outcomes leading to customers being overcharged. (See PJM Capacity Prices Crater and FERC Backs PJM IMM on Market Power Claim.)
“The net CONE times B offer cap assumed competition where it did not exist and led to noncompetitive outcomes and led to customers being overcharged by a combined $1.454 billion in the 2021/2022 and 2022/2023 BRAs,” the Monitor said. “The logical circularity of the argument, as well as the fact that key assumptions are incorrect, means that the [Capacity Performance] market seller offer cap was not based on economics or logic or math.”
Despite believing the auction succeeded in securing competitive results, the Monitor wrote that the Reliability Pricing Model still has many components of a “significantly flawed market design.” These include the shape of the VRR curve; the participation of demand response resource in the capacity market; capacity imports; and the overstatement of intermittent capacity offers.
In addition to taking issue with intermittent resources offering capacity at a higher rate than permitted by their capacity interconnection rights, the Monitor said exempting those resources from the must-offer rule raises market power issues stemming from the ability to withhold supply.
“The failure to apply the must-offer requirement will create increasingly significant market design issues and market power issues in the capacity market as the level of capacity from intermittent and storage resources increases and the level of demand-side resources remains high. The failure to apply the must-offer requirement consistently could also create price volatility and uncertainty in the capacity market and put PJM’s reliability margin at risk,” the report says.
The report called for a consistent definition for capacity that includes being a physical resource at the time of the auction for all resource types. That requirement is not currently being applied to DR, nor to energy efficiency, both of which the Monitor said should be shifted to the demand side of the market. It also wrote that EE is accounted for in PJM’s load forecasting and the payments such resources receive don’t provide added incentive for participant behavior.
The use of a sloping VRR curve procures excess capacity and masks the flaws of “permitting the participation of inferior demand-side resources in the capacity market” by avoiding the need to rely on those resources, the Monitor argued. It said that the use of a vertical demand curve “equal to expected peak load plus a required reserve margin” would reduce capacity payments by nearly $1 billion. The report noted that the IMM’s recommendation was to rotate the curve halfway toward vertical for the current quadrennial review, while PJM opted for a curve rotated a quarter of the way.
“Use of the VRR curve increased the purchase of capacity [by] 10.1% and increased the total load payments for capacity by $983 million, or an increase of 81.1% compared to a vertical demand curve,” the report says.
Adam Keech, PJM | © RTO Insider LLCDuring an Oct. 18 panel at the Organization of PJM States Inc.’s Annual Meeting, PJM Vice President of Market Design Adam Keech said that a vertical curve would temporarily lead to lower capacity prices, but in the long term, it would replicate the very volatility that led to the creation of the capacity market in 2005. That volatility could lead to more generation owners deciding to retire their units, ultimately driving prices higher.
Though it hailed the shift to basing the MSOC on the ACR going forward, the Monitor that the ACR definition should be reworked to be based on the cost of producing additional capacity. Currently it’s defined in the tariff as the costs of operating a generator for the given delivery year.
“Avoidable costs are the marginal costs of capacity and therefore the competitive offer level for capacity resources and therefore the market seller offer cap. Avoidable costs are the marginal costs of capacity, whether a new resource or an existing resource,” the report says.
The report found that 139,399.5 MW of generation and DR cleared in the BRA, with a reserve margin of 21.6% and a net excess of 7,835.3 MW over the reliability requirement. The net excess increased 175.1 MW up from the 2022/23 BRA, which had an excess of 7,660.2 MW.
The report said that a vertical demand curve would have reduced revenues by 44.8%, bringing the total from auction clearing prices, quantities and uplift from $2,196,444,791 down to $1,212,977,260.
The accuracy of the peak load forecast also had a “significant impact on the auction results,” with the forecast for the third incremental auction being on average 3.1% lower than the forecast for the corresponding BRA. If the forecasted results had been 3.1% lower, total auction revenues would have been $1,729,724,427, a decrease of $466,720,364, or 21.2%, compared to the actual results.
The report found that the 15.5% decrease in the Commonwealth Edison capacity emergency transfer limit (CETL), amounting to 1,058 MW, did not have an impact on the auction results.
