New Jersey’s SB-2381, recently signed by Governor Christie, proposes to create a long-term capacity agreement pilot program (LCAPP) for the purpose of ensuring the construction of 2,000 megawatts (MW) of new generation in New Jersey. Proponents of the bill state that despite high capacity prices in Pennsylvania/New Jersey/Maryland (PJM) recent capacity auctions, new generation is not being built. This is costing ratepayers billions of dollars, and providing no benefits. At its core, the New Jersey bill raises concerns about the current state and future viability of PJM’s capacity market, and perhaps more broadly, the capacity markets in New England and New York as well.
The problem and its effects.
While current reserve margins [and capacity prices] do not indicate an urgent need for new capacity, the commentary from both load serving entities (LSEs) and generators alike is that current capacity markets are not achieving their purpose. And while some will point to the significant amount of demand resources that have entered the markets in recent capacity auctions, it is debatable as to whether demand resources will contribute to long-term system reliability in a similar manner to thermal generation.
LSEs state that new generation is not being constructed, despite high capacity prices. Merchant generators, in particular, reply that the capacity market constructs fail to support the construction of new generation. They insist that the markets fail to support the required investments because the capacity markets, themselves, fail to provide the clear forward-looking price signals they require. Uncertainty arises because capacity prices are volatile and difficult to forecast, and market rules have been subject to constant and sometimes dramatic change. With the state of today’s credit markets, revenue security and certainty are key factors to obtaining project financing, and these elements are largely unattainable from today’s capacity markets.
To be successful, the capacity markets of New England, New York, and PJM need to provide clear, forward-looking price signals, that, at the appropriate time, provide investors and the financial community with the certainty they will need.
How can the market respond?
So, if the structural problems in the capacity markets ultimately will prohibit them from providing the necessary price signals for new entry, what can be done to correct the problem, and how can confidence be created to support the financing of new generation when it is needed? We believe there are four key elements, which are critical to developing a viable solution.
A detailed description of PA's proposed solutions can be found in the full length article, please contact us now.
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