Energy Insider Blog

Background

On Friday August 21, 2015, PJM released its annual capacity auction results for 2018/2019. The results were delayed 3 months to allow the Federal Energy Regulatory Commission (FERC) to review and approve the new Capacity Performance rules. The new stipulations were drafted as a result of: 1) natural gas interruptions during the last two winters, 2) The 2014 Polar Vortex record low winter temperatures caused forced outages in PJM accounting for 22% of the total capacity or 40,200 megawatts (MW), and 3) coal retirements. In January 2014, generators that had committed capacity to the grid were not assessed any significant financial penalty for non-performance. Therefore Capacity Performance regulations were designed to:

• Incentivize investment in new generation

• Improve performance by ensuring adequate power capacity during extreme weather or system emergency events

• Ensure firmer fuel supply, and

• Strengthen electric grid reliability.

Under the new guidelines, PJM can impose higher penalties on generators that do not operate during emergency hours (non-performance).

The auction for 2018-19 is the first of a two-year phase-in of capacity performance rules. At least 80% of capacity that cleared the auction, including generation, demand response and energy efficiency, had to meet the new Capacity Performance standards. The remaining 20% needed for reliability, known as a base capacity, is unable to commit to Capacity Performance standards and therefore is subject to penalties only during the summer peak period. Capacity Performance is targeted to be the only capacity product in PJM for the 2020-2021 delivery year.

Capacity Cost and Prices

The clearing auction price across most of the grid was $164.77/MW-day; however, because of transmission constraints, prices cleared at $225/MW-day in the Eastern Mid-Atlantic region (EMAAC) and $215/MW-day in the ComEd zone, which includes Chicago and parts of Northern Illinois. In most zones, the base capacity product cleared at a discount of approximately $15/MW-day compared to the Capacity Performance product.

The table below shows Capacity Resource Clearing Prices for the Capacity Performance and the base capacity products in $/MW-day. We estimated what the $/MWh prices would be for 100% Load Factor (flat load profile – Industrial end user) and a 50% Load Factor (higher usage during on peak hours – Commercial end user). Load Factor is the ratio of average energy demand vs. the peak energy demand (e.g. Capacity Obligation) during a given period. Therefore, the lower the Load Factor, the higher the $/MWh Capacity price will be for an end user, and vice versa.

PJM will hold two transitional auctions to supplement PJM’s prior capacity purchases for the 2016/2017 and 2017/2018 planning years with the new capacity performance product.

The Base residual auction price for the 2018/2019 planning year were 47% higher, on a $/MW-day average basis, compared to those for the 2017/2018 planning year. As previously shown, the cost impact will be much higher on electricity end users whose facilities have a low load factor.

Conclusion

demand. PJM conducts Base Residual Auctions to allow for the procurement of resources commitments to meet system peak demand three years in the future. Additionally, PJM holds three incremental Auctions. The First, Second, and Third Incremental Auctions are conducted to allow for replacement resource procurement, increases (procurement) and decreases (selling excess) in resource commitments due to reliability requirement adjustments, and deferred short-term resource procurement. Out of the 166,837 MW secured in the 2018/2019 auction, over 3,500 MW of new generation were attracted, including 3,000 MW of new generating units and over 500 MW of uprates to existing generating units. New generation procured in this year’s auction was well below the 5,927 MW of new generation that cleared in last year’s new Base Residual Auction for planning year 2017/2019 (Source: PJM).

The 2018/2019 auction procured capacity that would yield a reserve margin of 19.8%. Such reserve margin is well above PJM’s Reserve Requirement of 16.2% for the June 1, 2014 through May 31, 2015 planning year.

The new Capacity Performance rules are expected to provide the following benefits:

• Increased reliability

• Lower spot and forward energy cost volatility

  • Forward price volatility should be lower as the market perceives less risk

  • Forward electricity prices in PJM will be more correlated with natural gas prices as natural gas-fired generation fills the gap left by coal retirements

• Lower occurrence of price spikes during extreme weather events

Even though PJM’s commercial and industrial electricity end users (load) will benefit from the new rules, the cost for reliability will be high.