Does the lack of long-term pricing undermine the financing of new power plants?
Johannes Pfeifenberger and Sam Newell are principals of The Brattle Group. The article is based on Section IV of the authors’ recent review of PJM’s capacity market. The authors acknowledge the contributions of Robert Mudge, James Read, Kathleen Spees, and Paul Sotkiewicz. The opinions expressed in this article, as well as any errors or omissions, are solely those of the authors.
Capacity markets were implemented in a number of restructured power markets to meet resource adequacy requirements through a market-based solution. However, after several years of experience with capacity markets, their performance is questioned by many market participants.
While Brattle Group’s recent review of PJM’s capacity market, the Reliability Pricing Model or “RPM,” concludes that the market is performing very well, discussions with a number of stakeholders reveal considerable doubt that capacity markets can support new generation investments.1 The general concern is that prices are too uncertain because capacity auctions establish the price only for one year at a time, and buyers aren’t willing to sign long-term contracts bilaterally. However, different stakeholders also offer different perspectives.