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Northeastern US capacity markets have been effective, but challenges loom


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New York — While Northeastern US capacity markets have been effective at guiding new power generation investment over the past decade they are increasingly being challenged by changing generation mixes, new technology and policy shifts, ISO officials and an industry representative said Wednesday.

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"I think the capacity market has done a very nice job in the PJM [Interconnection] of attracting investment" over the past 10 years during an important change in the generation mix, Vincent Duane, senior vice president of law, compliance and external relations at PJM, said at the S&P Global Platts Financing US Power Conference in New York.

Close to 80% of the investment in new generation over the past decade in PJM has come from merchant producers not underwritten by consumers with the risks associated with that investment borne by private capital, Duane said. And while that is a success story, some of the current capacity market challenges were not anticipated, he said.


The heat rate of PJM's coal-fired power fleet is still over 10,000 Btu/kWh. New natural gas-fired combined-cycle plants with 62% to 65% efficiency at 1,200 MW capacities with 6,500 Btu/kWh heat rates are coming on to the system, Duane said. This capacity isn't necessary from the utility perspective, but the capacity market is attracting it to replace existing legacy resources, he said. "In some cases people don't want to see that outcome and in some cases those people are policymakers" with legitimate generation concerns, but as a system operator we don't have the mandate to address that, he said. The challenge fundamentally is prices are not sufficient to retain resources that certain policymakers in certain states want to see remain, he added.

Nuclear power plant owners in Illinois receive zero-emissions credits that value the clean air attributes associated with those plants that would otherwise be uneconomic in PJM's markets. Ohio and Pennsylvania could consider similar programs in upcoming legislative sessions.

Matthew White, ISO New England's chief economist, agreed, saying capacity markets are arguably some of the most controversial, but they have been effective at incentivizing new-build generation when conditions dictate. Alberta, Canada, and the UK are in the process of adding capacity markets despite the controversy because they are a good way to give investors confidence, he noted.

Capacity markets have been effective at meeting core needs, agreed Dan Dolan, president of the trade group New England Power Generators Association. The challenge in New England, New York and PJM is how do those markets interact when there are constraints the markets were not designed to meet such as fuel security, he said.

Looking ahead, up to 60% of the megawatts to be served by the capacity market will come from resources that get some extra state-level benefit or carve-out, Dolan said. Having 40% of the market still reliant on competitive energy prices that are "tremendously depressed" and will likely decline with more price takers in the market is a "really tough nut to crack on a forward basis," he added.


Solar power projects that include energy storage components are not very well suited for US northeast capacity markets due to power system designs and winter conditions, the panelists said.

During an extreme two-week cold snap in early January across the Northeast when it was cloudy and there was a foot and half of snow, solar with storage was not very helpful, Dolan said. Under those conditions, the issue is not about shifting peaks around for a few hours -- what happens when these conditions last for days, he asked.

The economics of short-duration storage with batteries "that can run around and chase the price every five minutes but can't last for more than about an hour or two" are challenged in New England where there is not a lot of short-term price volatility, White said.

If the economics were there on the technology side, being able to store energy for several days would be helpful, he said. Pumped hydro can "sort of do that today," but the current generation of lithium-ion batteries cannot, he said.

-- Jared Anderson,

-- Edited by Richard Rubin,