Value of conventional fossil generation in PJM considering renewable portfolio standards: A look into the future

Abstract

Widespread, large-scale deployment of renewable generation resources with low or zero running costs can have the effect of reducing average locational marginal prices (LMP) in PJM's Energy Market. A PJM study from 2009 showed the introduction of 15 GW of wind resources in PJM would reduce average LMPs by $5/MWh. Lower LMPs in the PJM Energy Market will have the effect of reducing net energy market revenues that can be earned by conventional fossil generation resources and place such resources at a greater risk for retirement unless sufficient revenue can be earned elsewhere in PJM's markets. If conventional fossil resources can earn sufficient revenues in PJM's Reliability Pricing Model (RPM) Capacity Market that make up for reduced net energy market revenues, then conventional fossil generation can and will remain a large part of the generation resource mix. However, conventional fossil generation would, through higher RPM Capacity Market prices, provide greater value as Capacity Resources than as energy resources in the presence of widespread penetration of renewable generation resources. Such a transition makes sense as renewable generation resources are intermittent in their output and are given a considerable discount off their nameplate capacity values as Capacity Resources due to their intermittency. Yet, given renewable portfolio standard (RPS) and production tax credit policies, renewable resources have greater value based on their energy output, value beyond net energy revenues that can be earned in PJM's Energy market, than as a Capacity Resources. The current economic and policy environment provides a preview of the evolving value of conventional fossil generation from energy towards capacity. As a recent PJM study has shown, coal-fired generation in PJM has seen a dramatic decline in net energy market revenues as the recession and declining natural gas prices have reduced the value of energy from these resources. Additionally, these coal-fired resources are facing large capital investments in environmental retrofits that must be paid from earnings in PJM's Markets. Given the erosion of net energy market revenues, additional revenues would need to be earned in the RPM Capacity Market in order to remain financially viable and avoid retirement. In order to remain financially viable these resources would need to earn additional revenues from PJM's RPM Capacity to continue operating into the future.