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PJM report defends market in debate over subsidizing nuclear

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PJM report defends market in debate over subsidizing nuclear

Allegationsthat the PJM Interconnection LLCis shortening the lifespans of coal and nuclear plants by failing to sufficientlycompensate their generation are unfounded, a new report claims.

Againstthe backdrop of state proposals aimed at subsidizing nuclear plants, PJM staff ina May 5 report, "Resource Investmentin Competitive Markets," cautioned policymakers on the negativeeffect that subsidies and other public policies can have on market efficiency.

"Policymakersmust weigh these trade-offs, but understand that pursuing individual actions that'defeat' efficient market outcomes will aggregate to a point they will altogetherthwart effective operation of the market to the point it can no longer be reliedupon to govern resource exit and entry and attract capital investment when needed,"the report said.

Expoundingon this, Vincent Duane, PJM senior vice president, general counsel and secretary,said in a news call: "Trade-offs can be minimized, perhaps, if externalitiescan be priced and the market can more readily digest those policy choices by puttinga price on them, but that is not always possible — there will be still trade-offs."

The latestpublic policy trend that could affect energy markets are proposed "zero emissions"credits aimed at keeping nuclear plants online as a means of maintaining grid reliabilityand cuts in carbon dioxide emissions. While New York is rushing to compensate itsstruggling upstate nuclearfleet at above-market energy prices, legislationin Illinois has been introduced to prevent the retirement of Exelon Corp.'s "challenged" nuclear plants, and Quad Cities, which participates in PJM. The prospectof looming nuclear retirements have raised questionsif PJM and other markets are doing enough to keep nuclear plants online and running.

However,PJM's report found no evidence that its cost-effective market is causing prematureretirements by inadequately compensating these legacy nuclear plants or coal plants.Duane said the reality is that coal and nuclear plants are simply uneconomic ina cost-efficient market such as PJM and unable to compete in an era of low energyprices brought on by cheap natural gas. Furthermore, coal plants are under the strainof tougher environmental regulations.

The reportsaid explicit subsidies that seek to compensate for attributes beyond PJM's cost-effectivemarket design create a "capital bias" for favored resources by loweringtheir capital costs. In turn, the report said this bias may lead to an overinvestmentin those resources at the expense of commodity prices and the financial viabilityof otherwise cost-effective resources. Out-of-market incentives and subsidies createdby policymakers can also create an uneven playing field for competitors, weakenthe value of the market's signals, and entrench consumer and political interestsin maintaining subsidized assets, the report said.

PJM,which remains neutral on such policies, understands that the wider implicationsof a nuclear plant go beyond reliability and emissions, Duane said. "There'sno question that the retirements of legacy generation can create a disruptive effectto local economies, [lead to] job loss [and] loss of tax revenues for local communities,"he acknowledged.

Duanefurther acknowledged that generation deserves compensation for attributes that arenecessary in maintaining grid reliability. For example, he noted that PJM's recentcapacity market reforms recognize and compensate resources for the important attributesof dependability and availability. "But attributes like zero emissions, whichmay be highly desirable from a global perspective, are just really not part of ourmandate. Our mandate is cost-effective reliable operations of the electricity grid,"he said.

In additionto addressing criticisms, the report focused on comparing the costs of market entryand exit for generation resources in PJM's competitive wholesale electricity marketwith the state regulated markets of Virginia and Florida.

Accordingto Duane, PJM is providing the support needed for investors to build new combined-cyclenatural gas plants — "the prevailing resource of the day" — at pricesonly somewhat higher than regulated markets. Despite risks for new projects in PJMbeing born by merchant investors as opposed to ratepayers in regulated markets,roughly 134,000 MW of proposed natural gas projects have entered the PJM queue since2010, Duane said. "It's hard to imagine that sophisticated investors are deployingtheir capital into PJM in that manner if they're not expecting adequate returnsto support that investment."

"Wedetermined that we're doing a pretty good job in PJM in attracting particularlythe low-capital-costs technologies that may be the game-changers for tomorrow,"Duane added. "And at the same time our market is avoiding some of the veryhigh-capital-costs, more experimental projects."

Thosehighly risky, capital-intensive technologies include next-generation nuclear, utility-scalesolar, coal gasification and carbon capture. The report cited Tennessee Valley Authority's long-awaited $6.1 billion, 1,150-MWWatts Bar nuclearplant in Tennessee as an example in its cost comparison of entry for large-scalegeneration. While a natural gas combined-cycle project's estimated costs are $1,400/kW,Watts Bar 2's estimated costs are $5,304/kW. Likewise, Southern Co.'s delayed and overbudget $6.5 billion, 582-MWKemper County coal gasification andcombined-cycle with carbon capture project in Mississippi is estimatedto cost $11,168/kW.

"Weas a system operator are fuel agnostic. There is nothing other than the market thatis making the judgment of whether or not those technologies make sense in PJM,"Duane said.