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Integration of Variable Energy Resources in PJM Markets

This roundtable panel discussion explores the economics of wind energy development in PJM markets, with a focus on the challenges and potential solutions related to renewable portfolio standards (RPS), wholesale energy markets, and the use of renewable energy credits (RECs). The session also examines the potential for long-term power purchase agreements and other approaches to reduce costs and promote stability in renewable energy development.

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Integration of Variable Energy Resources in PJM Markets

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  1. PJM Restructuring RoundtablePanel I: The Integration of Variable Energy Resources in PJM Markets, Planning, and OperationsMarch 30, 2016Eric Thumma, Director of Policy and Regulatory Affairs“The Economics of Wind Energy Development in Restructured Electricity Markets”

  2. PJM Class I RPS Background • RPS States: New Jersey, Maryland, Delaware, Washington D.C., Pennsylvania, Ohio, Illinois, and North Carolina • PJM “Liquid Market” (e.g. PJM Class I) driven by New Jersey, Maryland, Pennsylvania, and Delaware • Washington D.C. – allows MISO resources • Ohio -- RPS frozen • North Carolina -- very limited demand in PJM • Illinois – not a meaningful driver of PJM REC demand • Virginia – voluntary • PJM Class I demand approximately: • 20 million MWh by 2020 • 25 million+ MWh by 2025 • Wind equivalent = 6,500 MW in 2020 and 8,000 MW in 2025 • Investment equivalent $6.5 billion and $8 billion

  3. Power Plant Investment in PJM • Wholesale energy markets promote efficient competition among “existing” generators • RPS Challenge – RPS requires new build which requires capital investment • Wholesale energy markets don’t promote capital investment – “missing money problem” • Capacity market design promotes new conventional build in PJM for reliability requirements – addresses missing money problem • RPS Challenge II – how to encourage new build of resources that are primarily energy resources to meet RPS requirements – renewables missing money problem? • Answer -- RECs

  4. Renewable Energy Revenue Sources Renewable Revenue Total Renewable Prices RECs Market Price Wholesale Energy Other Market Revenue Federal Incentives

  5. REC Market Characteristics • REC markets are a volatile, unreliable revenue source; they are also potentially inefficient • REC prices determined by REC supply/demand balance, not a project’s incremental revenue requirement • Oversupplied REC market – price falls towards zero • Undersupplied REC market – price rises towards the ACP • Market “upside” capped by ACP/Cost Caps/Policymaker Price Tolerance • Increasing RPS demand expires 2020+. What happens to supply/demand expectations then? (See “Oversupplied” bullet above) Over the long-term REC markets might enable appropriate incremental project revenue, but they would do so with meaningful risk, higher costs, and a potential for policy failure.

  6. REC Market Characteristic’s in Action Potential “cost cap” $ REC prices must rise in out years ACP Required REC price over time REC price in “oversupplied” market Time

  7. REC Market Policy Lessons • Learn from the capacity market construct • Forward price • Price designed to assure recovery of incremental costs • Other approaches: • Long-term PPAs – Massachusetts Green Communities Act • Long-term REC purchases – NYSERDA Model • RPS a function of distribution rates – proposed in Illinois “Long-term, bundled power purchase agreements with creditworthy entities can reduce costs and provide a long-term stable energy hedge for volatile energy prices for ratepayers” – NYSERDA, 2015

  8. Questions, Comments, Criticisms… Eric Thumma 484-680-9085 ethumma@iberdrolaren.com

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