Efficiency in Capacity Markets

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PJM Capacity Prices Rising Fast

Capacity prices in PJM soared in the recent capacity auction. (See my post Ten times as expensive at PJM.) The price rise will be reflected in higher bills for consumers. Consumer bills will not go up by a factor of ten, because capacity prices are only part of the bill. Still, there will probably be double-digit increases in people’s bills.

In the future, capacity prices are set to go even higher.

On July 29, Ethan Howland of Utility Dive looked at the probable outcome of the next capacity auction. “PJM capacity prices could jump 157% in the next auction: Morgan Stanley .“ The price rise in the recent auction started from a low base, going from $29 per MW-day to $270/MW-day. The future rise will begin at the higher number.

As the Utility Dive article states: “almost every power plant in PJM cleared the last (capacity auction) so there was barely any excess capacity in the market.” Lack of excess capacity means that a small increase in demand could lead to a large increase in capacity prices and consumer prices.

Looking forward, Morgan Stanley analysts say that if the same plants clear in future auctions, capacity prices could go up to $700 MW-day. The analysts expect a modest rise (about 2%) in demand. Demand will rise. Supply will not increase. In consequence, prices will rise.

Will Efficiency Save PJM?

What about efficiency? If PJM could stop that modest rise in demand, wouldn’t that solve the problem? Maybe. PJM has tried to give capacity payments to organizations that provide efficiency. Paying for efficiency is part of a nationwide trend to encourage lower demand: virtual power plants, demand response, efficiency payments. These all provide payments for actions that could mean that less generation would be needed on the grid.

Okay. It’s time to dig a little deeper. We can start with the fact that the PJM efficiency payments may be illegal.

Bye-bye Efficiency

In July of this year, the Independent Market Monitor for PJM asked PJM to stop paying energy efficiency resources and recoup past payments. According to the Market Monitor, as reported in Utility Dive, PJM has been paying ineligible energy efficiency resources the capacity auction clearing price since 2016. Earlier in the year, group of state consumer advocates and U.S. Senators made a similar complaint about the payments.

How much money are we talking about? According to the article, PJM made capacity payments of about $120 million to energy efficiency resources for 2024-25. As a percentage of the total capacity ($14 billion) that cleared in the last auction, this is pretty small potatoes. Still, $120 million staying in consumers’ pockets is $120 million in consumers’ pockets.

PJMs “addback” mechanism is a major part of the problem. PJM removed energy efficiency from its evaluation of available supply (capacity). But it continued to pay energy efficiency as sort-of capacity through its addback. PJM claims the addback avoids double-counting resources. The Market Monitor disagrees.

Here’s a quote from the Market Monitor’s July FERC filing.

When EE (Energy Efficiency) was added to the forecast and EE was removed from the capacity market, PJM should have simply followed the tariff, recognized that EE was not capacity, recognized EE resources do not meet the definition of EE Resources in the filed tariff, and eliminated payment to EE resources.

Instead, PJM recognized that EE resources are not capacity, stopped including EE resources in the capacity auction, and began to pay EE resources an uplift payment equal to the capacity market clearing price.…The rationale for continuing to pay EE resources as if they were a capacity resources was and is unclear. PJM never stated that rationale clearly. …..

The complete removal of EE resources from the capacity market mechanism would make it unnecessary to address the multiple outstanding issues related to the task of accurately measuring the impact of EE, determining the ownership of any imputed savings, ensuring that the same EE are not submitted by multiple participants….

Let’s move away from the Independent Market Monitor’s FERC filing and look instead at the PJM committees. On August 21, the PJM Markets and Reliability Committee voted to eliminate efficiency providers from the capacity market. The discussion and vote were carefully reported in the August 26 issue of Utility Dive. PJM Stakeholders Endorse Elimination of EE from Participation in Capacity Market.

It looks like nobody is happy with how PJM pays for efficiency.

Is Efficiency Holy?

It may come as a shock that anyone could vote against efficiency. What could be better than investing in efficiency?

But that is the issue. You need to invest in efficiency, and that means you need to

· define efficiency,

· monitor efficiency, and

· compare it with other investments.

There can be problems with each of these steps. I plan to give examples in a new post.

Source: Meredithangwin.substack.com

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