By Rory D. Sweeney

WILMINGTON, Del. — What’s a megawatt really worth?

That question is at the base of the current debate about PJM’s capacity market construct, which last week shifted to whether there is a willingness to consider moving away from centralized markets.

At Friday’s meeting of the Capacity Construct/Public Policy Senior Task Force, the coalition of cooperatives and municipal power authorities that initiated the task force’s creation presented an alternative perspective on the objectives of a resource adequacy construct.

The task force was approved in January after the coalition pushed for months to revisit PJM’s controversial Capacity Performance construct. It began meeting in March. (See PJM Capacity Task Force Considering 60+ ‘Design Concepts’.)

Is the Market the Problem?

Navigant economist Cliff Hamal, representing American Municipal Power, offered a critique of a presentation that PJM’s economist Hung-po Chao gave at the task force’s first meeting in March. Hamal argued that PJM’s centralized capacity market is itself the problem.

“My goal was to try to ask the question whether the objective of this task force [should be] to maintain … what I believe to be an imperfect, problematic centralized auction and deal with state actions, or consider much broader options that have the potential to do it cleaner,” he said.

He argued that the task force’s objectives should allow consideration of market options based on long-term bilateral contracts that attract least-cost financing and have the potential to provide adequate supplies at a lower cost.

Other stakeholders questioned Hamal’s perspective, saying that eliminating the market would reduce variety and the ability to accurately price various options, potentially harming market participants.

“The buyer that enters into the long-term contract now has a liability that the rating agencies insist get shown on their books, such that by entering into this long-term contract, it increases the amount of debt that the rating agency sees and potentially results in a downgrade of the entity’s debt ratings because it’s incurring more debt,” said a representative of a generation owner that is actively building combined cycle plants. “You’re not looking at the other side of the equation for the buyer in that it increases the rate associated with all of his borrowing, and that’s a huge deterrent.”

Mike Borgatti of Gabel Associates argued the proposal limited the ability to shop for alternatives. He gave an example of buying wind production for $300/MWh when the capacity auction clearing price was $100/MWh.

“The difference there is that I know I could have bought other capacity for $100, but I liked this flavor of capacity better, so I overpaid for it,” he said. “The market has functioned correctly, and the price signal out there informed my transaction. If the price signal doesn’t exist out there, I don’t know if $300’s a good deal or a bad deal.”

Chocolate vs. Vanilla

Borgatti attempted to make the same point with a less esoteric product: ice cream.

“Look, chocolate’s over here; it’s available in the market for $3/gallon. I’m a vanilla guy, so I’m gonna go over here and I’m going to procure vanilla at a premium price because I love vanilla. That transaction is totally legitimate; I did what I wanted to … I love my vanilla. I’m sitting on my couch in my underwear having a great time,” he said. “I think it’s hard to think about a market that doesn’t have any price transparency. … It’s very difficult to know [if another construct would be better] because you got rid of the price that you would benchmark it against.”

“Your position seems to favor long-term contracts as a way to attract cheaper capital, but a potential result could be long-term contracts with cheaper capital but underlying resources that are much higher cost than other resources that would compete down the road,” Direct Energy’s Jeff Whitehead said. “If I take a 20-year position on a power plant that has a certain cost, 10 years from now, there might be another power plant technology available that’s much cheaper, so while I might get a cheaper cost of capital, I might actually get a more expensive overall solution.”

Hamal acknowledged there are tradeoffs, but he emphasized that the task force is establishing objectives at this point, not choosing among alternatives.

The remainder of the meeting attempted to distill some of the 71 objectives proposed for “a well-functioning capacity construct” into categories, but that effort fell apart as stakeholders felt the nuance of certain proposals was being lost. Dave Anders, who is facilitating the task force for PJM, decided to abandon that effort and instead include all of them into a poll to measure stakeholders’ interest in each proposed objective. PJM will be sending the poll out to all stakeholders signed up to receive notifications about the task force.

The task force also worked on developing a list of public policy initiatives states might make and plans to complete it at the next meeting, Anders said. Work will then begin on determining how to balance the state activities against PJM’s current capacity construct.

Jennifer Chen of the Natural Resources Defense Council gave a presentation on subsidies to add context to the public-policies list.

The task force has a target of the end of the year to determine if any changes to the capacity market should be made.