PJM report says the regional power market works, doesn’t always give regulators what they want

PJM has issued a report that, no surprise, finds the regional power promotes efficiency in operation and offers the right incentives for market entry and exit. The report does a few things, but none perhaps as useful as reminding policymakers that transparent, well-functioning markets do not always deliver the outcomes they wish for.

From the executive summary:

Realizing the “investment efficiency” advantages of PJM markets can require policymakers to accept tough choices and trade-offs because efficient market outcomes may inflict harm to other policy objectives. Policymakers must weigh these trade-offs but should understand that pursuing individual actions that defeat efficient market outcomes can thwart effective operation of the market. One likely result is that the market no longer can be relied upon to efficiently and effectively provide price signals to achieve efficient and reliable resource entry and exit. This paper acknowledges the widespread existence of subsidies of all sorts that influence PJM market outcomes.

PJM’s mission is to provide for a reliable and efficient wholesale power supply. The markets it designs and administers to accomplish this mission do not necessarily promote and may even conflict with other valid public policy interests that state and federal lawmakers and regulators may pursue to meet environmental, social and political interests distinct from the markets’ singular mission to deliver the most cost-efficient resources needed to serve customers reliably.

Although PJM markets are efficiently and reliably handling a changing resource mix resulting from forces currently affecting the industry, PJM’s continuing ability to deploy market forces to handle this responsibility is threatened if actions taken by lawmakers and regulators to promote other policy interests are pursued in a way that materially distorts price outcomes in PJM’s capacity and energy markets.

The report is divided into sections separately addressing “Operational efficiencies” and “Investment efficiencies.” The first section considers how well the system employs the resources available to it at any particular time, while the second considers how well the system provides support for efficient entry and exit decisions.

In making its case for operational and investment efficiencies, the article makes reference to the most common real world alternative approach: that of traditional rate-regulated, prudence-reviewed utility decision making. While existing markets may fall short of perfection, they seem to outperform other actually implemented systems.

By the way, observing the efficient markets do not necessarily deliver outcomes policymakers wants is not an objection to these hard to obtain values policymakers want to persue. The main point here is, as said above, that trade-offs exist and pursuit of alternative values is not free (even when–and probably especially when–the pursuit of alterantive policy ends is not budgeted but rather is simply regulated).

The article cites to academic and other literature in support of its claims, making it a useful introductory article for anyone interested in these issues.

Advertisements