Abstract

We
study the effects of capacity payments on the strategic decisions of plant
managers for peaking units in the PJM Interconnection. We achieve this
through a structural estimation of maintenance and switching costs between
the operational state, the standby state and retirement of generating units,
using annual data from 2001-2016. The empirical data shows less switching
between states after the introduction of capacity remunerations in 2007. We
find that the role of peaking units has changed, with the units being
dispatched more often. In the counterfactual analysis, we find a clear
connection between the level of capacity payments and switching. We conclude
that the current level of capacity payments in PJM incentivizes peaking units
to stay in the operational state.Stein-Erik Fleten (with Benjamin Fram, Magne Ledsaak, Sigurd Mehl, Ola Røssum, Carl Ullrich)