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May 16, 2014
Report by Brattle Economists Evaluates PJM Capacity Market and Provides Recommendations for Improved Performance

Economists at The Brattle Group completed the third triennial performance assessment of PJM Interconnection’s capacity market, the Reliability Pricing Model (RPM). Their analysis finds several key areas where performance can be improved to help ensure resource adequacy and increase market efficiency.

The purpose of the RPM is to attract and retain sufficient resources to reliably meet the needs of consumers at all locations within PJM through market-based procurement of resources. The RPM is now entering its eleventh delivery year, with the next auction scheduled for May 2014 to procure capacity for the 2017/18 delivery year.

The Brattle study evaluated three key elements of the RPM: (1) the Cost of New Entry (CONE); (2) the methodology for determining the Net Energy and Ancillary Services (E&AS) Revenue Offset; and (3) the shape of the Variable Resource Requirement (VRR) curve that is used to define the demand for capacity under the RPM. For each of these elements, the report evaluates how well the current design supports RPM’s resource adequacy and other design objectives, and provides recommendations on how its performance can be improved.

The detailed probabilistic simulation of RPM performance conducted by the authors finds that that existing VRR curve would not satisfy performance objectives of achieving an average Loss-of-Load Expectation (LOLE) of no more than one event in ten years for the system as a whole, and would fail to achieve resource adequacy objectives at the local level on a long-term average basis. The authors recommend revisions to the VRR curve that would meet the 1-in-10 LOLE objective on average, would reduce the frequency of low-reliability outcomes, and also significantly improve RPM performance under stress scenarios.

The report, “Third Triennial Review of PJM’s Variable Resource Requirement Curve,” is authored by Brattle principals Johannes Pfeifenberger and Samuel Newell, senior associate Kathleen Spees, and research analysts Ann Murray and Ioanna Karkatsouli. It is available for download below.