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Does Generation Investment Follow Locational Price Signals? Long-term Evidence from the PJM Electricity Market

Author

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  • Adamson, S.
  • Pollitt, M. G.

Abstract

A major claim for the benefits of locational marginal pricing (LMP) in electricity markets has related to increased efficiency in locational investment decisions. However, there has to date been little empirical evidence for this claim. Using a very large dataset of more than 1000 new plant investments in PJM over more than 20 years, we test whether LMPs have shaped investment decisions using quartiles and logistical regression techniques. We show that LMPs and locational capacity prices have been statistic ally significant in relation to where investments in solar and gas-fired generation across PJM, but not for wind generation. We also show that on an intrazonal basis LMP differences appear significant with respect to locational investment decisions for new solar generation within the Dominion zone of PJM. Finally, we note that while LMPs over longer periods of time are difficult to predict as they reflect natural gas prices and other economic variables, LMP basis differentials to a small number of traded hubs are much more predictable, consistent with new generators being able to hedge most price risks at a small number of traded hub prices.

Suggested Citation

  • Adamson, S. & Pollitt, M. G., 2026. "Does Generation Investment Follow Locational Price Signals? Long-term Evidence from the PJM Electricity Market," Cambridge Working Papers in Economics 2663, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2663
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    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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