An article authored by Brattle principals Hannes Pfeifenberger and Sam Newell that examines whether the lack of long-term pricing in capacity markets can support new power generation investments has been published in the December 2011 issue of Public Utilities Fortnightly.
In the article, “Trusting Capacity Markets,” Mr. Pfeifenberger and Dr. Newell explain that while a recent review of PJM’s capacity market, the Reliability Pricing Model, concludes that the market is performing very well in maintaining resource adequacy, some stakeholders believe that capacity markets are unable to support financing of new generation projects due to uncertainty in prices. Regulators and stakeholders attribute price uncertainty to the fact that capacity auctions establish prices for only one year at a time, and therefore, buyers are unwilling to sign long-term contracts.
Mr. Pfeifenberger and Dr. Newell show that the inability of capacity markets to support financing of new power plants is largely a function of market conditions that do not support investment of generation that has not been needed. The beliefs held by many market participants that capacity markets are unable to support the financing of power plants is also inconsistent with public power stakeholders’ concern that suppliers have been unwilling to offer such contacts. The authors note that generation investment and long-term contracting are likely to resurface once market conditions support the addition of new generating resources.
To read the article in its entirety, please visit the Public Utilities Fortnightly website.