Scarcity Pricing Is Driving Up Electricity Prices In PJM

Who’s afraid of competition now?

Utility Dive recently published a piece about Independent Power Producers (IPPs) pushing back on critics who blame IPPs for rising electricity prices in the areas served by the PJM Interconnection covering 67 million people across a region stretching from the Atlantic coast to Chicago. That article was an interview with the CEO of the Electric Power Supply Association, the industry association that represents IPPs.

Essentially, EPSA’s position is that IPPs are blameless for the increased prices and can respond to “price signals” by PJM to produce more electricity, and that IPPs are better positioned to meet this energy crisis than vertically integrated electric utilities. The argument is false for the following reasons.

First and foremost, it is scarcity pricing in deregulated electricity markets that is driving up consumer electricity rates faster than IPPs are building power plants. Why? The IPPs understand that they make more money by creating scarcity or withholding supply. There is no better way to withhold supply than by not building power plants. Consequently, over the summer, the region served by PJM suffered price spikes in the wholesale market up to 50 times the cost of producing electricity, and the PJM capacity market again exploded with prices exceeding 10 times the cost of producing electricity. That is the impact of scarcity pricing!

The fact that PJM is failing to bring new power online is not a surprise. PJM’s capacity market was never intended to provide incentives to build new generators. It was designed to pay power plants that are idle for much of the year just enough to make sure that they would be available for peak demand days in winter and summer. This strategy creates efficiencies and can lower utility bills throughout the year. But, again, it was a plan devised to reward scarcity, and IPPs are just playing along.

The EPSA insists that IPPs are responding to “price signals” and can build new power plants faster than vertically integrated utilities can build them. What prompted EPSA’s protest are requests by local utilities that are currently prohibited from owning generators to change state laws so that they can own generation and be allowed to compete against entrenched independent power producers. The entire point of “deregulated” markets was to encourage competition. The hypocrisy is obvious. IPPs are not getting the job done in a “competitive marketplace” but (please) don’t alter this “competitive marketplace” with any new competition.

The economics of electricity supply differs across the nation’s grids. For those states with deregulated markets with scarcity pricing, generators responded by creating more scarcity because that is how they are paid the most. The daily electricity-only markets have not provided enough incentives to build new power plants. After all, if price signals were sufficient, PJM and other competitive markets would not be in this position of watching electricity prices skyrocket because of scarcity. As they say, the proof is in the pudding.

In my state of Texas, the economy grew from $1.25 trillion to $1.99 trillion between 2010 and 2021, while the portfolio of dispatchable power plants actually shrank. The spike to $9,000 per megawatt hour for days during the 2021 winter freeze did not lead to the construction of any new dispatchable generation.

The wild price volatility caused by scarcity pricing in Texas has encouraged unprecedented growth in wind, solar, and batteries (measures of reliability in summer have improved but winter reliability is worse than it was 2021). What is often ignored is that Texas has kept the lights on during shortages by paying large scale customers like crypto miners to shut down. It has reached the point where the Texas Tribune came to the depressing conclusion that: “Texan Bitcoin miners profit by using less electricity…” In other words, IPPs aren’t getting the job done but are creating an illusion of competence by forcing ratepayers in Texas to subsidize crypto miners to turn themselves off and reap the profits.

Or in California, the combination of accelerated retirements of nuclear and fossil fuel power plants overwhelmed the ability of the daily market and capacity market to provide reliable electricity economically. CAISO finally paid to add 5,000 megawatts of new generation and storage. Again, where are the IPPs?

It is in the public interest to have more electricity supply to meet demand across every grid in America. Now that IPPs are faced with potential new competition they are crying foul. It is incumbent upon state legislators and grid operators to open their markets to new competitors. The national call is “All hands on deck!” If a local utility wants to build new power plants that compete with IPPs, who is to argue that is not a free market solution? Certainly not the IPPs, who claim to love competition unless that competition comes from an actual competitor who makes money by producing electricity, rather than by withholding it from customers.