Dive Brief:
- The Edison Electric Institute is calling for ending an “overreliance” on the PJM Interconnection’s capacity market, partly by giving states and utilities a more proactive role in procuring power supplies, according to a letter sent Tuesday by the trade group for investor-owned utilities to the grid operator.
- PJM’s capacity market has failed to deliver power supplies needed to meet rising demand despite major increases in capacity prices in the grid operator’s last two capacity auctions, according to EEI.
- “All parties — states, PJM, and stakeholders — must consider reasonable and appropriate ways to get generation built to meet system challenges and serve customers, which can include regulated generation, robust bilateral contracting, and improved self-supply frameworks,” Drew Maloney, EEI president and CEO, said in the letter.
Dive Insight:
The EEI letter comes amid surging capacity prices — which ultimately flow to ratepayers — and questions about whether PJM’s markets can ensure adequate power supplies amid growing demand, largely driven by data centers.
Typically, PJM holds annual capacity auctions to ensure it has enough power supplies to meet future needs.
PJM’s market monitor, ratepayer advocates and independent power producers contend that in general, PJM’s competitive markets are working, but may need some changes.
However, utility companies such as Exelon, FirstEnergy and PPL Corp. have been pressing for pathways for their “wires” utilities to get back into the generation business in states that ordered them to sell off their power plants.
“Policy reforms should avoid overreliance on procurement through the capacity market, which can involve additional complexity for incremental gains,” Maloney said. “To date, narrowly focusing on design changes to PJM markets has left customers exposed to reliability risks and cost uncertainty.”
EEI also called for giving utilities a more central role in PJM decisionmaking to help speed it up.
“Stakeholders that own grid assets and serve customers must drive outcomes, and the pace of decision-making must accelerate,” Maloney said. “While robust stakeholder input is critical, reliability risks will not wait for consensus among an array of stakeholders whose objectives and goals often differ.”
Stacey Burbure, senior vice president of transmission business development and joint ventures at American Electric Power, echoed those comments at a Sept. 22 summit hosted by PJM governors.
“This [PJM] governance structure was designed for a different era,” Burbure said. “So when we think about if we were designing a new RTO today, in addition to speed, inclusion and accuracy … you would want a structure that has some sort of built-in mechanism to keep up with the pace of change, to keep up with the speed of business that we are facing today.”
PJM is at an “inflection point,” with many stakeholders saying that the organization needs some change to help produce outcomes that are quicker and more “durable,” according to Todd Snitchler, president and CEO of the Electric Power Supply Association, a trade group for IPPs.
However, Snitchler questioned EEI’s characterization of utility power plant ownership as an “innovative” solution.
“They want to ratebase new generation, which is how we did things in the 1950s,” he said in an interview. “I think we're better served by making sure the wires utilities can do what they need to do to deliver the electrons and have the politics be maybe moved back into the background, and allow the market participants and stakeholders to actually arrive at outcomes that are going to deliver the resources cost effectively as soon as practicable.”
Further, utility power plant ownership hasn’t been shown to be cost-effective compared to competitive markets, according to Snitchler.
AEP’s subsidiary, Appalachian Power Co., which owns power plants, is charging its customers in West Virginia $450.20/MW-day for capacity compared to the clearing price of $329.17/MW-day from PJM’s last auction, he said. For the 12-month period starting June 1, 2024, APCo charged $464.74/MW-day compared to $28.92/MW-day for most of PJM in that period.
Snitchler also said utilities and other load-serving entities have the option of hedging their capacity costs, but most did not when capacity prices were low over a three-year period starting in mid-2022. The three capacity auctions before PJM’s last two auctions produced record-low capacity prices, he noted.
“The failure for load serving entities to hedge that risk is not a market failure,” Snitchler said. “It's just a tool that they didn't avail themselves of, and now it's become apparent that perhaps, in hindsight, that would have been a good approach for them to take.”
