Capacity markets were created to provide "missing money" to support new generation investments given capped energy prices. There are ongoing debates around whether capacity markets successfully incentivize new builds. While capacity markets in PJM and ISO-NE have driven some new generation, issues remain around the treatment of demand response, gas-electric integration challenges, imports, and mitigation rules. ERCOT is also facing declining reserve margins in coming years.

1. Do Capacity Markets
Send a Signal for New-build Generation?
Peter Maloney, Senior Writer, Platts Power Group
Platts Commodity Week, Houston
October 9, 2013
© 2013 Platts, McGraw Hill Financial. All rights reserved.

2. Do Capacity Markets
Send a New-build Signal?
• What are capacity markets and why were they
created?
• To ensure reliability by providing the “missing money”
• The “missing money” problem
• In markets with capped energy prices and mandated adequacy
requirements, returns from energy and ancillary services will not
provide sufficient compensation to support the cost of new
generation. – Dr. Roy Shanker
2

3. Do Capacity Markets
Send a New-build Signal?
There are two types of electricity:
• Energy – keeps the lights on
• Capacity – makes sure they stay on
3

4. Do Capacity Markets
Send a New-build Signal?
• How do you pay for something that is not used, i.e., capacity?
• Assign a value to capacity via a competitive auction
• There are four organized capacity auctions:
– ISO-NE
– NY ISO
– PJM Interconnection
– Midcontinent ISO
4

5. Do Capacity Markets
Send a New-build Signal?
5

6. Do Capacity Markets
Send a New-build Signal?
6
• Peak Load (MW – 7/2011) 163,848
• Capacity (MW) 185,600
• Energy (GW - 2012) 832,331
• Members 800+
• Generation Sources 1,365
• Millions - people served 61
• Area Served (Sq Miles) 214,000
• States served 13 + DC
• Transmission Lines (Miles) 62,000+

7. Do Capacity Markets
Send a New-build Signal?
7
• Peak (7/23/12) 98,576 MW
• Capacity 131,522 MW
• Annual billing 526 TWh
• 11 states, one Canadian province

8. Do Capacity Markets
Send a New-build Signal?
8
• Peak demand (7/19/13) 33,956 MW
• Capacity 37,925 MW
• Transmission 11,005 miles
• Total power usage (2012) 162,842 GWh
• Peak demand (8/2/06) 28,130 MW
• Capacity 32,000 MW
• Generators 350
• Customers served 6.5 million
• RTO population 14 million
• Interconnections to N.Y., Canada 13
• High voltage transmission (miles) 8,000 miles

9. Do Capacity Markets
Send a New-build Signal?
• Distinctive features of capacity markets:
– Demand curves
– CONE (cost of new entry)
– Mitigation
9

10. Do Capacity Markets
Send a New-build Signal?
Demand curves: vertical vs. sloped
Demand Curves for PJM, NYISO, and ISO-NE (Source: Brattle Group) 10

11. Do Capacity Markets
Send a New-build Signal?
• CONE
– The levelized capital costs and annual
fixed O&M costs for a hypothetical gas-fired
combustion turbine or combined-cycle
unit in the delivery year for that
capacity market.
11

12. Do Capacity Markets
Send a New-build Signal?
• Mitigation
– Supply side:
pivotal supplier test (PJM, NYISO)
de-list bids (ISO-NE)
– Demand side:
MOPR (minimum offer price rule)
(& exemptions to MOPR)
12

13. Do Capacity Markets
Send a New-build Signal?
Capacity market comparisons
`
PJM NYISO ISO-NE MISO
Auction name base residual market (BRA) installed capacity market
(ICAP)
forward capacity
auction (FCA)
planning
resource auction
(PRA)
Type uniform price uniform price descending clock uniform price
Forward commitment period three years six months three years two months
Delivery period one year one month or six months one year one year
Unit price MW-day kW-month kW-month MW-day
Replacement auction three annually no annual & monthly no
Demand curve
downward slope downward slope vertical vertical
Generation must offer? yes only pivotal suppliers only new resources only previously
cleared resources

14. Do Capacity Markets
Send a New-build Signal?
14
Capacity Clearing Prices in Each RTO and Select Sub-Regions for
Commitment Periods between 2006 – 2017

15. Do Capacity Markets
Send a New-build Signal?
15
NERC 2013 Summer Reliability Report
NYISO MISO PJM ISO-NE
projected demand (MW) 33,279 91,532 145,029 26,690
anticipated resources (MW) 39,592 108,742 187,531 32,458
anticipated reserve (%) 18.8 18.8 29.3 21.6
NERC reference reserve (%) 17 14.2 15.9 15

16. Do Capacity Markets
Send a New-build Signal?
16
200,000
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
2007 2008 2009 2010 2011 2012 2013
Installed Capacity
Forecast Peak
Reserve Margin
PJM Interconnection reliability metrics

17. Do Capacity Markets
Send a New-build Signal?
17
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
New York ISO reliability metrics
41,898 42,159 43,686
38,970
37,782 38,622 38,936
33,452 33,865
32,439 33,279
18,665 18,645 18,538 18,705
2010 2011 2012 2013
41,452
Megawatts
Available Resources
Required Resources
Peak Load
Average Demand

18. Do Capacity Markets
Send a New-build Signal?
18
PJM and ISO-NE: new generation additions (MW)
6,000
5,000
4,000
3,000
2,000
1,000
0
ISO-NE
PJM

19. Do Capacity Markets
Send a New-build Signal?
19
Capacity Additions in PJM auctions, 2014-15 (Source: Brattle Group)

20. Do Capacity Markets
Send a New-build Signal?
20
• PJM’s 2016-17 Base Residual Auction drove investment in:
– New generation
– Imports
– Retirements
– Demand Response

21. Do Capacity Markets
Send a New-build Signal?
21
200
180
160
140
120
100
80
60
40
20
0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
MW-day
PJM price signals

22. Do Capacity Markets
Send a New-build Signal?
New generation in PJM’s 20116-17 BRA
New
Generation
Generation
Uprates
Imports
Demand
Response
Energy
Efficiency
2016/2017 4,282 1,181 7,483 12,408 1,117
2015/2016 4,899 447 3,935 14,833 923
2014/2015 416 341 3,017 14,118 822
• Panda-Moxie Liberty 829 MW gas plant in Bradford County, Pennsylvania
22
• Based on $2/MMBtu nat. gas in Marcellus vs. $4/MMBtu at Henry Hub

23. Do Capacity Markets
Send a New-build Signal?
23
Capacity imports into PJM, 2016-17 BRA
2015-16 2016-17
west of PJM 3,621 7,070
other 314 413
total 3,953 7,483
• Only 4,788 MW (64%) of the cleared imports
had confirmed firm transmission service
• MISO auction: $1.05/MW-day
• PJM auction: $59.37/MW-day
• Ameren increased exports to PJM 100 to 900 MW
• Dynegy is looking to export up to 3 GW into PJM

24. Do Capacity Markets
Send a New-build Signal?
24
Retirements
• FirstEnergy to close another 2,080 MW of coal plants in
PJM
• A second wave of retirements?
• NRG Energy to close Norwalk Harbor plant in Connecticut
• Another 6 GW of plants at risk of retirement?

25. Do Capacity Markets
Send a New-build Signal?
25
• Issues facing capacity markets:
– Demand Response
– Gas-electric integration
– Imports
– Mitigation (MOPR)

26. Do Capacity Markets
Send a New-build Signal?
26
Issues: Demand response
• PJM is looking at changes to its demand curve

27. Do Capacity Markets
Send a New-build Signal?
27
Issues: Gas-electric integration
• ISO-NE – gas used for heating; lack of natural gas pipelines
• MISO – looming coal retirements
Issues: Capacity imports
• Ameren increased 100 MW to 900 ME
• Dynegy looking to export up to 3,000 MW
• Will PJM limit imports?
Issues: MOPR
• New Jersey – 2,000 MW LCAAP program
• Maryland – PSC solicitation for in-state generation

28. Do Capacity Markets
Send a New-build Signal?
28
ERCOT’s dwindling reserve margins
Panda in Texas
Temple: 1,200 MW
Sherman: 1,200 MW
ERCOT’s footprint
2014 13.80%
2015 11.60%
2016 10.40%
2017 10.50%
2018 9.40%
2019 7.40%
2020 6.50%
2021 6.00%
2022 5.20%
2023 4.50%

29. Questions?
© 2013 Platts, McGraw Hill Financial. All rights reserved.