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PJM’s Market Monitor Report on March 14, 2019 states: PJM’s Capacity Market is Non-competitive

Photo by Jorge Zapata on Unsplash

On March 14th PJM’s Independent Market Monitor (MMU) published the PJM State of the Market – 2018 report with one glaring observation, the Capacity Market is non-competitive:

Several items were cited in reaching this conclusion, but I want to focus on two items in particular:

  • The PJM region failed the three pivotal supplier test (TPS), which is conducted at the time of the auction. Structural market power is endemic to the capacity market.
  • There are several features of the RPM design which still threaten competitive outcomes. These include the definition of DR which permits inferior products to substitute for capacity, …

Regarding the first bullet; is the PJM MMU positing that structural market power is endemic to ALL capacity markets or just the PJM Capacity Market design? As this report is written as an assessment of PJM’s Markets, I’ll assume the later.  Which raises the question, what would a proper capacity market design look like to address this market power issue and other cited issues? The report contains specific recommendations to address these, and other, issues. Other alternatives are also being discussed within the context of a national standards development initiative under NAESB.

Regarding bullet two; referring to DR as an inferior capacity product (see page 251). I agree that DR Capacity is not functionally equivalent to Generating Unit Megawatts. Try initiating a black start using DR and you’ll see what I mean. However, this statement could be expanded to “Not All Capacity is Equal” and one could argue that capacity should be properly valued, based on what services/benefits it provides to the grid for reliability, meeting State Energy targets, positive impacts on the environment, i.e. clean air, and water, and the elimination of pollutants, i.e. fly ash. Yes, DR is not the same as a generating resource with current flowing, but it certainly does have some value, in terms of the services it can provide for grid reliability. Texas has some real success stories in this regard from their “Under Frequency Relay” interruptible load programs.

PJM’s MMU authors may want to reconsider their statement that describes Demand Response resources as “inferior” and consider the benefits, including the superior response of UFR’s in Texas during emergency conditions.  Given that ERCOT’s Reserve Margin for 2019 stands at 7.4% as compered to the NERC Reference Margin, of 15%, one could assert that DR resources in Texas may be even more valuable than in past years. It’s true that not all capacity resources are created equal, but that does not mean DR resources should be classified as “inferior” or that they lack value in providing grid operators with a useful tool in their challenge to keep the lights on. I wonder how many generating units were prevented from tripping, or worse, due to the automated DR load shedding from UFR’s in Texas?

It’s time for a new capacity market design that properly values all capacity for the services/benefits it supplies to the grid.

Richard Brooks's picture

Thank Richard for the Post!

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Bob Meinetz's picture
Bob Meinetz on March 18, 2019

Richard, DR is neither inferior nor superior as a capacity product, because it isn't one. By assuming lack of demand is equal to surplus of supply, we fail to recognize that with DR the customer loses either way (she either has to pay more money, or pay with a price in convenience).

The shareholders of any monopoly utility using demand response to meet its load obligation should take the hit for the cost of fake "capacity". There's no amount of fancy accounting which can change the fact customers get nothing of value in return.

Richard Brooks's picture
Richard Brooks on March 18, 2019

Bob,

I suggest you look at the benefits in Texas from UFR devices responding to disturbances in rapid fashion. I'm guessing there would be more than one system operator who would admit that these helped manage a serious situation and that has value. I do admit that too many "things" are classified as "resources" in capacity markets. However, there is no denying the usefulness of these "tools" i.e. UFR's in Texas, to help manage the grid; just don't call them capacity - that I think we can agree on.

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