PJM’s market was designed to rely on a capacity market instead of price-spikes to induce an adequate supply of generation. Were it not for PJM’s links to other markets, this design could help keep prices below $150/MWh without any harm to the supply side of the market, though with some damage to incentives on the demand side.

But PJM must compete for reserves and energy with many other markets that annually produce energy-price spikes that exceed 100 times average cost. These external markets can buy PJM’s energy, thereby forcing it into emergency conditions. One useful but unintended safety valve has been the internal exercise of a small amount of market power which has raised energy prices in PJM, thereby reducing exports, encouraging imports and curbing emergency conditions. The result has been price spikes inside PJM that are indistinguishable from those of a market that uses price spikes to induce generation investment.

Most problematic may be the fact that the current penalty for failing to meet the capacity requirement is too small to guarantee PJM the output of its required capacity. Increasing this penalty would make PJM more effective but could result in a greater exercise of market power in the capacity market.