PJM’s Capacity Auction Seen Increasing Reliability – And Prices

August 24, 2015

As we mentioned in our prior piece, customers in the PJM territory are less likely to face the fuel shortages, plant shutdowns, and outages that stressed the grid during the polar vortex of 2014, but they likely will have to pay more to enjoy the benefits of that reliability.

On Friday, the grid operator released the results of its capacity auction for the June 2018 – May 2019 delivery year, the first under its recently approved “pay for performance” plan. PJM will increase payments to generators to $164.77 per MW per day, up 37 percent from the $120 figure for the past 12 months.

Overall, power producers will receive $10.9 billion for their commitment to keep plants running during periods of highest demand, an increase of 45 percent over last year’s payout of $7.5 billion. PJM has argued in the past that any increases in auction costs would be offset by the benefits that accrue from greater reliability and less volatile pricing.

According to the Wall Street Journal, the collective impact could be a boost in customer bills of $2 to $3 per month.

“The price signals here and the incentives for investment – given the additional responsibility these resources are taking on – we believe (are) going to be extremely important for the reliability of these resources going forward,” said PJM’s Senior Vice President of Markets.

Andy Ott, the grid operator’s executive vice president, added: “The stronger requirements for capacity performance represent an insurance policy for consumers against capacity shortages and dramatic price spikes. The auction prices are in line with the costs of securing this dependable capacity.”

The results of the auction largely fell within analysts’ expectations, which generally ranged between $150 and $200 per MW day. Tudor Pickering Holt & Co. projected payments of $175; Wood Mackenzie forecast $155.

Additionally, PJM secured 166,837 MW of supply in the auction, down from last year’s 167,004 MW. The decline is attributed to a lower demand forecast, but still pushed the reserve margin to 19.8 percent – up slightly from 19.7 percent for the year before and higher than the grid operator’s target of 15.7 percent.

Other highlights of the auction include:

• New plants, mostly natural gas-fired, accounted for 2,919 MW. That s roughly half of last year’s 5,927 MW.

• Generation updates and imports accounted for 588 and 4,688 MW, respectively.

• Capacity from demand response increase 1 percent, to 11,084 MW.

• Because of supply constraints, capacity costs were set higher for two regions: The Eastern MAAC delivery area – which includes Public Service Electric and Gas Co., Jersey Central Power and Light, PECO, Atlantic City Electric, Delmarva Power, and Rockland Electric – cleared at $225.42; prices in Exelon’s ComEd region increased to $215. 

This was not the end of the auction process for PJM. The grid operator will run transitional auctions for 2016/17 beginning the week of Aug. 31 and 2017/18 in the first week of September.

PJM’s “pay for performance” plan, approved in June by the Federal Energy Regulatory Commission, emerged after the extreme winter weather of January 2014, when the grid operator’s outage rate hit 22 percent. More than 40,000 MW of the fleet’s 180,000 MW could not be delivered. When frigid temperatures settled in, stockpiles at coal plants froze and natural gas plants could not get enough fuel during a period of cold-induced record high prices.

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