Examining the Impact of Oversupplied Generating Capacity on Wholesale Electricity Markets

Abstract

Over the past decade, the region of the United States operated by the PJM Interconnection has experienced an incredible increase in its power capacity. Between 2009 and 2018, the PJM region added 40,376 MW of capacity to the system, representing growth of 24.4%, despite essentially flat growth of peak demand load. Many researchers have speculated that the cause of this capacity explosion is the design of PJM’s capacity market, into which resources and load-serving entities bid, allowing the grid to ensure reliability through resource adequacy and demand response. In this paper, I analyze the effects of oversupplied capacity on the PJM system. Using a linear regression model with fixed effects for fuel types, I model capacity and generation growth in other regions of the United States, then use the results to make a prediction about how the PJM region might have grown in the absence of the capacity market. Then, I compare the actual data with this counterfactual scenario to estimate a cost of excess capacity. Compared to the predictions, the data suggest that the PJM region has 15,610 MW of excess capacity, and this capacity comes at a replacement cost of $14.706 billion. This cost represents a lower bound, as it only includes investment cost and neglects ongoing fixed costs. This is a cost ultimately paid by consumers when these resources clear the capacity auction and the expenses eventually show up on customer bills.