Center for the Advancement of Energy Markets

1
Center for the Advancement of Energy Markets
Estimating the Benefits of Restructuring
Electricity Markets An Application to the PJM
Region
Dr. Ronald J. Sutherland Senior Scholar, CAEM
http//www.caem.org ? 2003 Center for the
Advancement of Energy Markets
2
Working Group Reviews

• CAEM Formed A Working Group of About 20 Persons
• Initial Review Proposed Scope of Work
• Draft Review
• Final Draft Review
• Stakeholder Review One-on-One
• Press Conference

3
Dollar Benefits From Restructuring in PJM
Region
4
Economic Definition of Benefits

• Net Willingness to Pay
• Producer and Consumer Surplus
• Used in Economics Textbooks, C-B Analyses, EPA
  and OMB

5
Net Benefits From RestructuringAn Electricity
Market
Q0 Q1
Quantity kWh
6
INDUSTRY PERSPECTIVE OF BENEFITS

• Increased Plant Capacity
• New Construction
• Reliable Service
• Fuel Diversity
• Reduced Wholesale Prices
• Green Power/Environmental Benefits

7
Sources of Benefits

• Retail Market
• Limited Competition
• Flat Rate Pricing
• Wholesale Market
• Viable Spot Market
• Prices Declining Over Time
• Market For Total Capacity
• Rule of Thumb 1 in 10 Years
• Limited Price-Demand Response

8
TOTAL CAPACITY MARKET

• PJM - Effort to Reduce Peak Use
• PJM - Rebate to avoid energy use
• PJM Program Too Costly
• Inefficient Design
• Adverse Equity Effects Robin Hood in Reverse

9
Conclusions

• Current Efforts Large Benefits to PJM Region
• Future Efforts Additional Large Benefits
• Major Task Price-Demand Response
• Short Run Political Costs/Risks
• Long Run Large Benefits Over Decades

10
Important Questions About Cost Benefit
Analysis

• What does it mean when we talk about cost benefit
  analysis of changing from one market design to
  another?
• What factors (qualitative as well as
  quantitative) should be considered?
• Should we focus on net social benefits or include
  impact analysis on stakeholders (including
  winners and losers)?
• How could we use final results to make informed
  decisions on future direction of market design?
• How could we minimize disagreements on final
  results to prevent analysis paralysis?