\u201cThe desire for safety stands against every great and noble enterprise\u201d Tacitus<\/p>\n
If you do not already know about the capacity market please read Part 1 – History of Capacity Market<\/a>.<\/p>\n The Proposed Capacity Market<\/strong><\/p>\n Due to the polar vortex of 2013\/2014, several hours observed extremely high outages leaving a potential reliability concern.\u00a0\u00a0 The deduction from PJM for the cause of this issue was that the compensation and non-performance penalty was not sufficient to ensure system reliability.\u00a0 Therefore, they have created a modification of the RPM Model<\/a>. \u00a0The new rules will add significant constraints to participation in the capacity auction plus adds more penalties. The bulk of the capacity value will come from Capacity Performance (CP) resources.\u00a0 These resources need to provide sustained, predictable operation 16 continuous hours per day for three consecutive days \u2013 during both summer and winter peak load and extreme weather conditions.\u00a0 CP resources must also have a startup time of less than 24 hours under normal conditions, and 14 hours under hot or cold weather alert periods.\u00a0\u00a0 This essentially eliminates any consumer behavioral options including many popular Demand Response programs such as A\/C cycling since this will not likely occur in the winter.<\/p>\n In general, all the utilities are supporting this move other than a little maneuvering to lower the penalty cost.\u00a0\u00a0 This new layer of RPM will essentially give existing generation a huge boost in earnings \u2013 hence the upgrades of many utilities<\/a>.\u00a0 \u00a0This certainly smells and feels like a knee jerk reaction by PJM.\u00a0 This move appeases the utility and will very likely avoid the societal backlash of having to deal with brownouts.<\/p>\n The consumer is not seeing the price signal nor the real cost of power by overlaying it with such a high level of capacity value with limited participation from outside technology.\u00a0\u00a0 The utilities and PJM are certainly making sure to take advantage of the situation by pushing this through.<\/p>\n My first concern is the extrapolation from the outages being related to the capacity payments.\u00a0 It is true that RPM is designed for the peak- which is summer not winter.\u00a0\u00a0 However, the balance issue cannot be attributed to the RPM construct.\u00a0\u00a0 In order to understand the PJM issue that occurred in January 2014, you have to have an appreciation of what occurred in the past two years.<\/p>\n For the past two years, PJM observed relatively mild winters.\u00a0 In addition, in each of those two years, natural gas price eroded the energy share of coal generation.\u00a0 For most of 2013, you had the natural gas price forward prices below $4\/mmbtu throughout the winter of 2013\/2014.\u00a0\u00a0 In addition, 2012 and 2013 were not good years for any generators in particular coal generators\u00a0due to the low power prices.\u00a0\u00a0 It would be very reasonable to expect a Sr. Commercial Operations Manager to question the budget for winterizing coal units to run in the winter time leading into the 2013\/2014 winter.\u00a0\u00a0 Based on two years of history, one could see the coal plants did not run significantly, yet required a fixed cost that was not being recovered.\u00a0 In my estimate, many took the gamble to cut the FOM allocation for winterizing the coal units.\u00a0 The data potentially shows this to be the case.\u00a0\u00a0 On January 7th\u00a0<\/span>2014, coal units represented the largest component of the outages at 34% with gas following at 23%.\u00a0 This is not a case of capacity rules having to be modified.\u00a0 The reason I state this is because it is clearly a free market lesson on not being penny wise and pound foolish.\u00a0 AEP coal units fared well in the outage and they ended up with record profits almost doubling 2013 1Q profits<\/a> – $560 million in profits.\u00a0 I can promise one thing this year.\u00a0 The Sr. Commercial Operations Manager is not questioning the budget request from the coal plants to winterize the facility.\u00a0 He can get fired for making the mistake twice, but he won\u2019t get fired for spending more fixed cost on a unit that may not run this winter.<\/p>\n In terms of the gas unit outages, this can be partially attributed to the past.\u00a0\u00a0 Typically, gas units did not run very much particularly in the western PA and Ohio regions.\u00a0\u00a0 Firm gas capacity can be purchased by the utility.\u00a0 Because the units historically didn’t run much, fixed cost would translate to much higher gas bidding cost which, in turn, would lead to even less running of the gas plants. \u00a0When I was at AEP, I was promoting buying firm capacity and selling the capacity to various counter parties during low usage time periods to mitigate some of the cost.\u00a0\u00a0 However, as noted before, change is very hard in a utility and there is more risk than reward to change behavior.\u00a0\u00a0 Even though many utilities generation are de-regulated, it still takes time to change the culture.\u00a0\u00a0 It will change.\u00a0 But, one shouldn’t expect it to change within only a few years.\u00a0\u00a0 \u00a0\u00a0However now that gas prices have been competitive for multiple years, the utilities should have learned the value of buying firm capacity.\u00a0 I am confident firm gas transport is being purchased now and will grow in the future.\u00a0 Sometimes, the market needs time to learn from first-hand experience vs. people advising them.<\/p>\n The very party who stands to benefit from the de-regulation and the free market model is not allowing the model to be free.\u00a0\u00a0 Free markets need to learn from the market not to be coddled by additional monetary mechanism, or else you get a system that would extensively be more costly than regulation.\u00a0\u00a0 This new capacity construct eliminates innovation.\u00a0 It will produce a safe environment for reliability \u2013 but so did regulation.\u00a0 If we continue down this path of coddling the system and not allowing the consumer and participants to see their consequences of their actions, we will be no better than regulation and likely potentially worse.\u00a0\u00a0 PJM will be creating a system of limited downside risk with all the upside rewards.\u00a0 Case in point, AEP Ohio historical earnings for 2014 Q1 would have been shared back to the rate payers in Ohio.\u00a0 Because AEP Ohio generation spun off in 2013, it was all kept in house \u2013 Good Timing for AEP!<\/p>\n If we want to keep it safe then let us go back to regulation or let the market learn its lesson and remove the knee-jerk safe call so we can create something great and noble.<\/p>\n Your Open to New Ideas and Thoughts Energy Analyst,<\/p>\n David<\/p>\n David K. Bellman \u201cThe desire for safety stands against every great and noble enterprise\u201d Tacitus If you do not already know about the capacity market please read Part 1 – History of Capacity Market. The Proposed Capacity Market Due to the polar vortex of 2013\/2014, several hours observed extremely high outages leaving a potential reliability concern.\u00a0\u00a0 The deduction […]<\/p>\n","protected":false},"author":1,"featured_media":267,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,6],"tags":[336,258,369,337],"class_list":["post-1433","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-market-insights","category-power","tag-capacity-market","tag-pjm","tag-power","tag-reliability"],"_links":{"self":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/1433","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/comments?post=1433"}],"version-history":[{"count":4,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/1433\/revisions"}],"predecessor-version":[{"id":1436,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/1433\/revisions\/1436"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media\/267"}],"wp:attachment":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media?parent=1433"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/categories?post=1433"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/tags?post=1433"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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