How Electricity “Capacity” Markets Work

Source: Bacon’s Rebellion (BR).

A WSJ article posted here a couple of days ago mentioned PJM, a regional organization to which Virginia’s electricity providers belong. WSJ made the point that Texas opted for a slightly different regulated market model for wholesale electricity than PJM’s. As WSJ noted, the main difference is PJM’s creation of a “capacity market,” a slightly more costly model that Texas chose not to pursue. BR explains how the capacity market in Virginia functions.

BR’s renewables discussion is of special interest:

“All this works pretty well for regular, fossil-fueled and nuclear generators. How can a solar or windmill unit deliver on a capacity commitment when there’s no sun or wind, or a hydro unit when there’s no water? They can’t. They are non-dispatchable. So, originally, they were excluded from capacity markets. These generator owners, however, argued successfully to FERC that they did have some value for reliability as there was a measurable probability, if not certainty, that they would be there when needed. To make a long, complicated story short, PJM now credits commitments from such units with a partial capacity value if the total commitment is not in excess of certain percentages of an LSE’s [Load-Serving Entity] total generating capacity. It’s not much, and there’s no way under current rules that an LSE could present only renewables capacity to meet its total capacity requirement, but it’s something.”

In effect, PJM’s capacity market discourages wind and solar to maintain reliability standards.

7 thoughts on “How Electricity “Capacity” Markets Work

  1. I needed an acronym dictionary to read that explanation. It seemed thorough and well written.

    From what I could understand, we are part of a multistate grid that demands certain reliability from its member generators. Whereas Texas allowed autonomy for its providers to do as they saw fit with looser requirements. And they had no extraterritorial grid rules to worry about.

    You asked what “system” I referred to the other day in a comment I made. Well, this article outlines the systems used by us and Texas.

    And Texas’ system failed on many fronts. Included is a billing option that few consumers could interpret but laid the groundwork for surprise billing at egregious rates. Foregoing winterizing after 10 years of warnings based on actual outages from cold weather is another part of the Texas system. Stating off the grid was also part of the Texas system.

    Put another way, El Paso opted out of the Texas system and did just fine.

    Science via the engineers was set aside in favor of dice rolling for greater profits. Trouble is that gambling with public infrastructure is not a good idea. It is literally a matter of life and death when bridges collapse, dams break, roads crumble, and water supplies are damaged or contaminated. Provided electricity is in the same category.


    Liked by 2 people

    1. RE: “From what I could understand, we are part of a multistate grid that demands certain reliability from its member generators. From what I could
      understand, we are part of a multistate grid that demands certain reliability from its member generators.”

      That’s pretty close to my understanding as well, but I would emphasize that a capacity market doesn’t really demand reliability in a technical sense, it creates a demand for future capacity, which in turn becomes a vehicle for imposing technical standards on contracted suppliers.

      It’s a subtle point, but in theory you don’t need a capacity market to impose technical standards, and you can have a capacity market without exploiting it to meet engineering objectives. Texas chose not to have a capacity market of the PJM type and not to impose standards on suppliers. That looks pretty stupid in hindsight, but it was not an unreasonable decision, all things considered.

      To illustrate, Texas LSEs had a financial incentive to make their facilities reliable. They would make more money during periods of peak load when wholesale electricity sold at a higher price, as long as they stayed online. But for that incentive to work, the LSEs had to do their own reliability engineering. The methods for that are well-known and understood for fossil-fuel plants, based on centuries of experience. The new energy sources mix, not so much.


      1. “The new energy sources mix, not so much.”

        So the winterization kits that were recommended and offered to Texas power companies would not have made a difference? I disagree.

        And now 5 members of the ERCOT board have resigned over the entire situation. It may not keep them from being party to the civil suits that are already being filed, but it shouldn’t.

        Liked by 1 person

        1. RE: “So the winterization kits that were recommended and offered to Texas power companies would not have made a difference?”

          I wouldn’t say that. The LSEs were free to winterize and it might have been in their self-interest to do so. There wasn’t a lot of engineering history to go by. The effects of the storm will provide new data points for weighing LSEs’ investment decisions.


          1. RE: “2011 and 2014 weather events that were ignored.”

            Not necessarily. In Texas, the engineers working for the LSEs are the ones that mattered, not the ones working for Ercot or other agencies who had no regulatory authority over LSE operations. We don’t know what the LSE engineers told their employers, or whether the business managers appreciated what they were told. I can tell you from experience that business managers don’t always believe what engineers tell them. And, as I keep pointing out, given the brief history of renewable energy compared to thermal energy (multiple centuries) there are not very many cautionary tales even the best engineers can cite to give weight to any dire warnings they might offer.


          2. Another word salad.

            Wen the engineers and designers of systems make recommendations to protect said systems, it should be incumbent on the users of those systems to take those recommendations seriously. It appears they were not and used the “100-year storm” idea to justify NOT taking the recommended precautions.

            In TEN years, in Texas alone, there have been THREE “100-year” weather events. I’ll give them 2011. But 2014? Not so much. They had 6 years to do something about their infrastructure and ignored it. And Texas energy users paid over $29 BILLION for the unreliability that was provided.


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