Last week, PJM’s market monitor (IMM) released a report on the most-recent capacity market auction that includes this finding: the auction results “were not competitive as a result of economic withholding.” monitoringanalytics.com/reports/Report… (h/t @RTOInsider)
Economic withholding is an exercise of market power intended to raise prices in the market above competitive levels by pricing offer blocks high enough to effectively “withhold” or reduce the quantity of supply that is offered at “competitive” prices. sites.hks.harvard.edu/hepg/Papers/Al…
The IMM finds that these offers are allowed under PJM’s rules. The quirk in the rule that allows these offers relates to an assumption about capacity performance penalties. IMM calculates that these uneconomic bids raised prices by 40%!!
Many have noted that several nuclear plants failed to clear the auction. IMM summarizes – “More nuclear capacity was offered at higher sell offer prices and fewer nuclear MW cleared.” Makes sense.
IMM calculates that had all nukes offered at $0 – as had been typical in earlier auctions – market prices would have been 40+% lower. Put differently – “nuclear offers at levels exceeding $0 resulted in a 78.3 percent increase in revenues.” (!!)
The auction is based on PJM’s projection of regional peak load. IMM analyzed past PJM load forecasts (good idea) and found that they have been 5.8 percent higher than PJM’s subsequent projections.
Here’s the kicker – had PJM used a 5.8 percent lower load forecast in the most recent auction, prices would have been 40 percent lower (!!)
As @SpenceEnergyUT notes, IMM also finds market power: "Any supplier that, jointly with two other suppliers, owns more capacity than the difference between supply and demand either in aggregate or for a local market is jointly pivotal and therefore has structural market power."
That's IMM's longstanding critique of the RPM capacity construct. IMM's report is based on confidential data that presumably sellers do not have. If this report informs sellers' offers in future auctions, is it enabling the exercise of market power?
