Capacity Market PJM RTO Governance

New CEO Faces Old Problems in the PJM Market

November 21, 2019

Manu Asthana’s new job will not be easy.  PJM’s new CEO inherits an organization recovering from financial scandal, at odds with some of its largest constituents, and suffering from the loss of much of its senior leadership team.

Mr. Asthana’s first priority will probably be putting his new management team in place. After that, he would do well to turn his attention to reforming PJM’s beleaguered capacity market, the source of many of PJM’s conflicts with statesconsumersrenewable power providers, and others. Originally, the capacity market was intended to ensure that there was enough electricity available during those few hours each year when demand spikes. That seemingly simple task has led to no end of legal controversy: The capacity market has been paralyzed for well over a year thanks to a lawsuit over how it conflicts with state energy policy, was just called out by federal regulators to explain apparent discrimination against energy storage, and has been under review for almost two years on accusations it bills consumers for products they don’t need.

Against this background, we’re proud to announce a comprehensive review of capacity markets and possible paths to reform, Too Much of the Wrong Thing: The Need for Capacity Market Replacement or Reform, by Rob Gramlich and Michael Goggin of Grid Strategies. The report takes a close look at the more than $10 billion consumers across the United States spend on capacity every year, and documents how that money is funding construction of power plants far in excess of any actual consumer need. This is a critical problem facing PJM: subsidizing unnecessary fossil fuel plants distorts markets and crowds out renewable power, dragging PJM behind the rest of the country in developing clean electricity.

The new report goes deeper into this than previous work, and concludes that PJM’s capacity market is keeping almost 18GW of uneconomic coal plants in operation—one-third of all the coal in the region. Those coal plants emit around 130 million tons of CO2 ever year. Even without any explicit environmental policy, a well-functioning market would retire those plants and run gas-fired units instead, reducing COemissions by 75 million tons a year; if the coal was replaced with renewables, savings would be even greater.

Capacity Markets distill reliability down to a commodity product, and work on the assumption that if consumers pay for enough capacity, the grid will be reliable. This is an attractive simplification, but as Goggin and Gramlich point out, is a ‘crude definition.’ In the modern power grid, reliability comes from flexible, responsive resources, supply tailored to when and where it’s needed, and diversity of sources. The authors argue that capacity markets are fundamentally unable to address this complexity, and so inhibit the transition to a zero-carbon electric grid.

The report also talks about what may be the deep problem with electricity markets: They are largely governed by the same companies that benefit from preserving the status quo and inflating prices. We see this manifested in capacity market rules that undervalue alternative energy and exaggerate the need for traditional power plants. These issues that will be very important for Mr. Asthana as he reforms PJM’s governance and guides the grid through decarbonization. He appears well suited to address them.

Mr. Asthana’s last employer was Direct Energy, a competitive retail supplier, and he hails from Texas. Both of these bode well for his ability to reform capacity markets. During Mr. Asthana’s tenure at Direct Energy, the company was vocal about how PJM’s capacity market saddled consumers with unfair costs. And the ERCOT market in Texas is an energy only market, meaning there is no capacity market there. We hope Mr. Asthana’s background leaves him open to fresh thinking about reforming PJM’s capacity market; Gramlich and Goggin’s paper would be a fantastic place to start.