WASHINGTON – The electricity grid operator PJM’s capacity market has been overcharging tens of millions of customers to prop up unneeded dirty power plants, a new analysis found.
PJM, which has 65 million customers in a region from Illinois to North Carolina, has overestimated how much power it needs for more than a decade, while also offering to pay generators more than double their costs, according to the report by economist James F. Wilson. The combination results in customers paying as much as $4.4 billion a year in extraneous and unnecessary charges, the report concludes.
“Instead of encouraging competition that weeds out uneconomic, dirty generating sources, PJM chronically buys far more capacity than needed and foists those extra costs on consumers,” said Casey Roberts, a senior attorney at Sierra Club. “The role of the capacity market is to ensure reliability at the lowest possible cost -- not to load up the system with unnecessary and uneconomic resources.”
These additional charges not only hurt customers, they also serve as de facto subsidies for gas- and coal-fired power plants, keeping them operating when a rational market would force their closure.
“Injecting rationality into the process would save consumers billions of dollars while giving clean solar and wind power a better chance to compete,” said Tom Rutigliano, a senior advocate at the Natural Resources Defense Council’s Sustainable FERC Project.
The study, which was commissioned by the Sierra Club and NRDC, analyzed how PJM runs its capacity markets, which are used in PJM to ensure that enough power is available when demand spikes. Unlike the daily energy markets, in capacity markets generators pledge to provide electricity when needed at a time in the future.
Wilson found that PJM consistently overestimated the amount of electricity needed to meet demand with an adequate safety margin. In the worst year, PJM acquired an extra 18,700 MW of power above its safety margin, enough to supply a mid-sized state. On top of buying too much power, PJM offers to pay generators based on price estimates for obsolete and inefficient technologies. These overly rich prices attract unneeded new gas plants, and give them an undeserved windfall.
Changing the market rules would initially save customers $4.4 billion and then will continue to save them up to $2.6 billion each year, Wilson estimated.
“Forecasting is hard, and we don’t expect PJM to get it right every time, but PJM could use any number of commonsense approaches rather than just buying more than it needs and billing ratepayers for it,” added Rutigliano.
PJM’s mishandling of its forecasts and auctions is separate from the decision in December by the Federal Energy Regulatory Commission to impose new rules that would exclude state-supported resources from these same capacity markets. That change, if it is implemented, is forecast to cost customers billions of dollars more in additional charges.
PJM serves 65 million customers in 13 states and Washington, D.C.
The Natural Resources Defense Council (NRDC) is an international nonprofit environmental organization with more than 3 million members and online activists. Since 1970, our lawyers, scientists, and other environmental specialists have worked to protect the world's natural resources, public health, and the environment. NRDC has offices in New York City, Washington, D.C., Los Angeles, San Francisco, Chicago, Bozeman, MT, and Beijing. Visit us at www.nrdc.org and follow us on Twitter @NRDC.
The Sierra Club is America’s largest and most influential grassroots environmental organization, with more than 3.5 million members and supporters. In addition to protecting every person's right to get outdoors and access the healing power of nature, the Sierra Club works to promote clean energy, safeguard the health of our communities, protect wildlife, and preserve our remaining wild places through grassroots activism, public education, lobbying, and legal action. For more information, visit www.sierraclub.org.