RPM 101: How the electricity capacity auction works ...

The Reliability Pricing Model (RPM) was established by PJM, the operator of the electric grid that serves New Jersey and 12 other states. RPM is designed to make sure that there are enough electricity capacity resources to serve homes, businesses, hospitals and municipal buildings on the hottest and coldest days of the year – at the lowest possible cost.

An electricity capacity resource can be any type of power plant ( such as a large nuclear unit, smaller gas unit or wind farn) or the ability to reduce electricity demand through demand response or energy efficiency. Demand response is a conservation strategy in which customers voluntarily reduce consumption during periods of peak demand. The ability of demand resources to compete with traditional power plants is a unique feature of the RPM auction, which helps keep prices low for customers.
 
Each May since 2007, PJM holds a competitive auction to obtain sufficient electricity capacity where it is needed to reliably meet expected electricity demand three years into the future. This allows enough time for auction winners to deliver on their commitments. This May’s auction will be for capacity to be available beginning June 2015 until May 2016.

Before each auction, PJM estimates peak electric usage for the entire region and provides bidders with this estimate and other important information. The auction works to ensure that there is enough capacity to meet that peak usage, plus a reserve margin (a cushion for unforeseen events). Bidders can bid in their existing power plants, new power plants, demand response, and energy efficiency.  Their bid prices are based on the costs to have that resource available for that delivery year.

In the auction, PJM stacks up the bids from lowest to highest in various grid zones. The price bid by the final resource that meets PJM’s target establishes the price paid to all resources in that zone. This is called the clearing price. Sometimes, when capacity is short in one part of PJM, separate clearing prices are set for different areas. In the 2011 auction, for example, the clearing price was $225/MW-day for the PS North Zone and $136.50/MW-day for the rest of New Jersey.

An accepted bid is a commitment. If capacity resource is not available when needed, that resource owner is assessed a financial penalty.

The role of a capacity market is not to promote the building of new plants when less costly alternatives exist. Rather, it is to promote the most effective, low-cost solutions to ensure that there are adequate resources to provide power to customers every day of the year. 

The success of RPM was demonstrated last summer when New Jersey had 33 days with temperatures above 90 degrees without any service interruption.

Competitive Electricity Auction = Improved Reliability

Since 2007, RPM has resulted in the additional availability of 5,565 megawatts of new capacity resources in New Jersey through construction of new plants, improvements to existing plants, delayed plant retirements, energy efficiency programs, and demand response.

Across the region served by the capacity auction, more than 42,000 megawatts of additional capacity has been made available since 2007. This includes new generation, demand response, energy efficiency, upgrades to existing power plants, and an increase in imports from outside the PJM region.

Prices are Coming Down for Electricity Customers

Electricity is one of the few products that is getting cheaper.
The wholesale market is working for consumers passing along savings from the drop in natural gas prices. Each winter, New Jersey regulators supervise a wholesale electricity auction in which the state’s four  utilities secure the sources of power needed to serve their customers.  The final price of that auction has declined during the last four years by 24 percent.
 
Encouraging Efficiency

Well-functioning competitive markets are playing a constructive role in other important ways. They provide incentives to make operational improvements to provide additional capacity using existing plants. PSEG has responded to these incentives by dramatically improving its fossil-fueled operations. In 2011, for example, PSEG’s gas-fired, combined-cycle fleet achieved its highest output ever. Its coal fleet has not only been transformed through environmental improvements, but has continued to improve its ability to operate when called upon.

Another innovation being driven by the capacity market is the growth of energy-efficiency bidding by utilities such as PSE&G in the capacity auctions. Energy efficiency (EE) programs are investments that maintain a level of service (lighting, for example), but that do so with less energy. The revenues that PSE&G raises in this way are used to offset the EE program costs otherwise borne by ratepayers.

Innovative Energy Solutions: Demand Response Plays an Increasing Role

Demand response programs reward customers who agree to reduce their energy consumption during periods of peak load through such actions as cycling air conditioners on and off, reducing lighting, and shifting industrial schedules. Saving energy lessens the need to generate electricity in the first place – reducing costs for energy consumers, while decreasing environmental impacts. 

More than 14,000 megawatts of demand response resources cleared PJM’s most recent capacity auction. The growth of demand response is an important sign that markets are providing innovative solutions to meet New Jersey’s energy needs at the lowest cost possible.

PJM called on 2,100 megawatts of demand response during the hot July 2011 weather. On July 22, 2011, PJM met a record peak demand of 158,450 megawatts while maintaining a high standard of system reliability. 

A Cleaner Energy Mix in the Region

It is noteworthy that, in PJM, the capacity mix is becoming cleaner due largely to the increased role of demand response, energy efficiency, and renewable energy resources.

Since RPM’s inception in 2007, the composition of capacity in PJM has dramatically changed:

• Demand response has grown to more than 14,000 megawatts that cleared the 2011 RPM auction, from about 1,700 megawatts in 2006.
• 822 megawatts of energy efficiency cleared the 2011 RPM auction.
• Wind generation has grown to about 5,300 megawatts in 2011, from 175 megawatts in 2006.
• Solar generation has grown to about 124 megawatts in 2011. 
• Meanwhile, the 2011 RPM auction saw a 6,800-megawatt drop in coal capacity.

The energy markets in our region are working to provide clean, efficient generation and other innovative energy solutions, including conservation and energy efficiency.  The Reliability Pricing Model is playing an important role in this regard.  PSEG will continue to support solutions that promote investment and economic growth, while keeping costs as low as possible for customers.