Why capacity market prices are too high. (April 2022)

• Record Type: Journal Article
• Authors: Aagaard, Todd; Kleit, Andrew
• Is Part Of: Utilities policy. Volume 75(2022)
• Publication Date: 2022-04
• Subjects: Capacity markets -- Cost of new entry -- Peak demand forecast; Public utilities -- United States -- Periodicals; Public utilities -- Government policy -- United States -- Periodicals; 363.6
• DOI: 10.1016/j.jup.2022.101335
• Languages: English
• ISSNs: 0957-1787

Abstract

Abstract: The Federal Energy Regulatory Commission and regional transmission organizations have fixated on a concern that prices in electricity capacity markets are too low. In fact, however, capacity markets are significantly overpriced. The reason for this is that the administratively determined demand curves in capacity markets create conditions that procure far more electricity capacity than what is needed to meet reliability objectives. In particular, the operators of these markets systematically overestimate both the relevant peak demand for electricity and needed payments for generators to enter the market. The result is that consumer pay billions of dollars extra for excess capacity. Highlights: Capacity market prices in PJM are systematically too high, resulting in billions of dollars in extra costs for consumers. These high prices occur because PJM overestimates the capacity required for reliability and the funds needed for new entry. FERC should enhance its oversight over PJM's capacity market and require better estimations of capacity requirements and cost of new entry. Alternatively, PJM could directly estimate the economic value of capacity, rather than basing demand on supply attributes.