All of us agree that reliable electricity is paramount in PJM . . . it is essential to the health of our economy and our quality of life. Capacity Performance will work like an insurance policy for reliability. For a modest additional cost, consumers will receive significantly improved protection from interruptions during peak demand periods and from extreme fluctuations in prices like we saw during last January’s Polar Vortex.
Retail electricity prices vary widely, but the net cost at the wholesale level for this insurance is expected to be equivalent to about $2 to $3 per month on a typical home electricity bill when Capacity Performance is implemented in 2018. I want to be clear that this is a general range of expected impacts, and it does not include other factors that may cause capacity prices to increase.
The two most frequent questions we have received since we initially offered this solution are: why is PJM doing this . . . and why now?
The reasons for improving generator performance are very clear. In a few words: reliability and price. While not the sole driver of these changes, last January served as a stark example as to why they are necessary. On the coldest day of the year, 22 percent of the generation in PJM was unavailable to serve customers.
Another way of looking at the problem: more than 40,000 megawatts out of the 180,000 megawatts of capacity in PJM were not able to produce when consumers needed them most. That’s more than the installed capacity of many of the largest generation fleets in the nation.
While PJM and our member companies worked hard and successfully to keep the lights on, we had to take emergency measures to prevent interruptions, and many customers received very large power bills. The low level of generator performance was largely responsible for power billings for the month of January in PJM reaching $11 billion . . . vs. billings of $3.3 billion for an average January.
Clearly, this is not acceptable.
Capacity Performance is pay for performance. It will provide upfront revenue for generators to make needed upgrades in plant equipment, weatherization measures, fuel procurement arrangements and fuel supply infrastructure. Those improvements are necessary in part because of the rapid and unprecedented fuel shift from coal to natural gas.
About 26,000 megawatts of generation in PJM – mostly coal-fired – will have retired by this time next year (since 2008) due to the twin forces of competition from natural gas and environmental regulations. Many of these units are older and less efficient and . . . with a limited service life . . . some of them have not been adequately maintained.
At the same time, natural gas has been suddenly thrust into the unfamiliar role of being the largest fuel source for generation in PJM. The natural gas fuel-supply infrastructure and markets are still catching up to the extraordinary demand being placed on them, as well as the different operating characteristics of the electricity markets.
Overall, PJM is managing this transition well, but our markets need to adapt to send the proper price signals to generators to encourage these investments. Without them, reliability will be at risk and consumers will continue to be vulnerable to unacceptable price spikes.
We believe that Capacity Performance will provide those signals. It places the full responsibility of producing reliable electricity on generators, who are the only ones able to manage the risks at their facilities that result in poor performance. It provides for the first time a strong, direct link between capacity payments and performance. Capacity resources will be required to deliver electricity whenever PJM determines that emergency conditions exist. Those that over-perform will be rewarded with funds collected from generators that under-perform.
Which brings me to why we believe it’s necessary to move forward with Capacity Performance now. Simply stated, we don’t have the luxury of time. As I mentioned, we had 22 percent of generators out of service last January 7. Studies have shown that just a 17-percent outage rate during extremely cold weather in 2015/2016 – after more coal generators are scheduled to retire and before enough gas generation is built to replace it – would result in certain customer interruptions.
We want a gradual transition to where Capacity Performance is the only capacity option in PJM within three years. To accomplish that, we need to file our proposal with the FERC now to have Capacity Performance in place by the May 2015 Base Residual Auction. Finally, all of the problems that led us to this point will still be here next year. Waiting would simply be kicking the can down the road and would, in my opinion, be irresponsible given the risks we face.
In summary, the risks are real, waiting would be unwise, and we have determined to move ahead.
We know this has been controversial . . . and we sincerely appreciate the time, energy and candor that members and stakeholders brought to the table in sharing their reactions and alternatives. We are moving ahead because our job is ensuring reliability, and we believe that, for a very small additional cost to consumers, we can provide genuine reliability benefits to the region we serve.
Under Capacity Performance, the system will operate more reliably, price spikes during system emergencies will be less pronounced and the chance of economically expensive forced outages will be reduced.
