Assessing the Implications of PJM Interconnection Capacity Market Reforms to State Energy Resource Transitions

Abstract

States are increasingly adopting policies which create supplemental revenue streams to advance energy priorities. Although the policies are effective at increasing or protecting specific resources, they distort the competitive nature of organized electricity markets. To remedy these price suppressing distortions, PJM Interconnection will expand the Minimum Offer Price Rule to require all state subsidized resources offer into the capacity market at a default minimum price. Through qualitative and quantitative analysis, this paper evaluates the impact of proposed capacity market reforms to new and existing capacity resources as well as the implications to state energy objectives. The analysis demonstrates that Minimum Offer Price Rule expansion will provide administrative pricing reform but will create challenging market conditions for new capacity entrants and renewable technologies while bolstering existing capacity units and fossil technologies. Further, existing nuclear units are unlikely to clear future capacity market price floors; thus, increasing the likelihood that these units will retire early. Since these policies acknowledge negative externalities, a coordinated subnational or national carbon price would be a more equitable method to reform the capacity market and incorporate state energy priorities.