The Brattle Group Releases Comprehensive Report for PJM Analyzing Pros and Cons of Alternative Power Market Designs to Address International Resource Adequacy

CAMBRIDGE, Massachusetts -

A Brattle Group report analyzing the advantages and disadvantages of alternative energy and capacity market designs was released today at a meeting of PJM Interconnection’s Capacity Market Evolution Committee. The report provides an international comparison of power markets to analyze the many challenges and design features that regulators and system operators worldwide are grappling with as they attempt to design competitive electricity power markets that assure long-term system reliability.

The report is part of PJM’s effort to prepare for its Long-Term Issues Symposium event on January 26 and 27, 2010. It analyzes existing research on various energy markets and provides an extensive review of international power markets, their energy and capacity market design features, and the extent to which these market designs have been able to attract and retain generating resources. The authors compare so-called “energy-only” markets, energy markets with administrative capacity payments, and energy markets with resource adequacy requirements that are enforced on a short-term or multi-year forward basis through bilateral markets or ISO-administered centralized capacity markets.

Johannes Pfeifenberger, co-author of the report and head of The Brattle Group’s utility practice, explains, “We found that many ‘energy-only’ markets have not yet shown that they will be able to attract and retain the generating resources needed to ensure long-term system reliability. Rather, many power markets continue to rely on out-of-market reliability backstops that hinder the effort to create competitive conditions, distort market prices, and perpetuate the need for regulatory interventions.”

The authors also analyze the common U.S. approach of imposing resource adequacy requirements, sometimes on a multi-year forward basis with centralized capacity markets. They find that centralized forward capacity markets add significant complexity to power markets but offer only modest advantages in wholesale markets with regulated, vertically-integrated utilities. However, despite their complexity, forward capacity markets offer substantial advantages in fully restructured power markets with retail competition by increasing price transparency, enabling market monitoring, ensuring reliability, and facilitating power procurement, especially in markets with small load-serving entities and migrating customer loads.

The report, “A Comparison of PJM’s RPM with Alternative Energy and Capacity Market Designs,” was authored by Brattle economists Johannes Pfeifenberger, Adam Schumacher, and Kathleen Spees. It is available at www.brattle.com and at www.pjm.com/committees-and-groups/committees/cmec.aspx.

The Brattle Group provides consulting services and expert testimony in economics and finance to corporations, law firms, and public agencies worldwide. Areas of expertise include antitrust and competition, valuation and damages, utility regulatory policy and ratemaking, and regulation and planning in network industries. For more information, please visit www.brattle.com.

Source: The Brattle Group

Laura A. Burns of The Brattle Group, +1-617-864-7900, Laura.Burns at brattle.com