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Energy Currents
A Blog by Enerdynamics

Capacity Market Auction Results and Rule Changes in PJM

by Matthew Rose, Enerdynamics Facilitator and Director at EMI Consulting
co-authored by Emily Rich, EMI Consulting

Earlier this summer against a backdrop of announced nuclear plant retirements, anticipated transmission project completions, and regulatory electric market auctioninvolvement from FERC, the Pennsylvania Jersey Maryland Interconnect (PJM) completed its 2021/2022 Reliability Pricing Model[1] capacity auction. A review of the auction results and recent regulatory and market stakeholder decisions provide insight into the RTO’s capacity situation, competitiveness of the auction and its need to determine its approach to capture market prices for its future capacity needs.

Highlights of the auction results

The capacity auction cleared over 163,600 megawatts of unforced capacity[2], representing a 22 percent reserve margin — well above PJM’s target of 15.6 percent. This total is slightly less than the 2020/2021 auction (165,000 MW).

In completing its auction in May, PJM saw increased auction prices as compared to the last few years. Prices came in at $140 per megawatt-day for much of the PJM footprint compared to $76.53 per megawatt-day in last year’s auction. A graphic presentation of auction results by region follows:

Source: RTOInsider.com

According to PJM, the higher prices in most locations reflected continued low energy market prices. This caused generators to make higher capacity offers to ensure they get enough revenues to cover costs, an increase in the net cost of new entry, and a drop in cleared capacity and the number of new generators. Some observers also believe that some generators chose to stay out of the capacity auction this year.

A closer look at the results points to the following:

  • One of the biggest results was the reduced amount of nuclear capacity that cleared the auction. The Base Residual Auction[3] cleared about 19,900 MW of nuclear power as compared to 27,400 MW in last year’s auction. Exelon and First Energy Solutions noted that some of their nuclear assets were either not bid or did not clear the auction.
  • The amount of cleared renewable generation increased over the past two years. Wind resources increased by 529 MW, increasing from 887 MW last year to 1,416 MW this year. Solar jumped from 125 MW last year to 570 MW this year. The total contributions of solar and wind are still relatively small for the region considering 164 GW of cleared capacity.
  • Generator plants relying on fossil fuels like natural gas also increased in this year’s auction by about a gigawatt in cleared capacity, while coal increased by 500 MW. Although no new coal plants are being built in PJM, higher capacity prices and greater efficiencies at the coal plants impacted bids.

Demand response and energy efficiency remain active contributors

The auction reflected the growing impact of demand response and energy efficiency as cleared resources. A combined total of 13.9 MW of demand response and energy efficiency cleared the auction, representing about 8.5% of PJM’s total capacity. This includes 11.1 MW of demand response (more than 3,000 MW greater than last year’s auction results) and 2,832 MW of energy efficiency clearing the auction.

Capacity market shifts within PJM

The auction results were viewed as providing good diversity for the PJM system while acknowledging the changes to the resource contributions from various sources.  The combination of the increase in capacity being met with renewable energy, demand response, and energy efficiency, when coupled with the fall in thermal generation demonstrates the beginnings of what may be a transitional shift in PJM.

PJM and FERC: The changing DR landscape

PJM and its capacity market operations are also undergoing changes and scrutiny from various stakeholders and regulators. The Federal Energy Regulatory Commission (FERC), as part of its review of a revised capacity market proposal from PJM, issued an order in June that declared parts of PJM's capacity market rules as being “unjust and unreasonable.” PJM originally argued that its capacity market is being distorted by state-subsidized resources such as nuclear power plants receiving state zero-emissions credits (ZECs) as well as wind and solar power backed by state renewable portfolio standard programs.

FERC's 3-2 ruling found that such policies improperly suppress wholesale electricity prices and suggested changes to limit their impact. PJM did not challenge FERC's rejection of its proposals but asked for more detail on whether elements of its two-part capacity repricing proposal could be included in its final market fix. PJM also requested to delay its next capacity auction to August 2019 to better respond to the FERC orders. In addition, PJM’s Independent Market Monitor recently reported that PJM’s 2018 Base Residual Auction was “not competitive” and amplifies the need to change how PJM sets its capacity offers. How the capacity auction is structured in the future remains to be seen.

All these considerations reflect a changing PJM capacity market, transitioning away from a fossil-fuel resource commitment to becoming more diverse while still facing serious questions about creating a competitive auction landscape and factoring in the policy changes occurring within some of the PJM states.

 

Footnotes and references:

[1] The Reliability Pricing Model is the name of PJM’s capacity market.

[2] Unforced capacity is the amount of a generator’s total capacity that is allowed the count as firm capacity in the auction.  It represents the percentage of weather-adjusted installed capacity available after a unit’s expected outage rate is taken into account.

[3] The Base Residual Auction is conducted to allow for the procurement of resource commitments to satisfy the PJM region’s capacity obligation for a delivery year three years into the future. A smaller Incremental Auction is also used to fill in for replacement resources, shorter-term requirements, and changes in capacity needs.

PJM Interconnect. 2021/2022 RPM Base Residual Auction Results. May 23, 2018

Jeff St. John. Prices Spike in PJM Capacity Auction. Greentech Media. May 23, 2028.

Gavin Bade. PJM Loses a Quarter of its Nuke Capacity in Latest Power Auction. Utility Dive. May 23, 2018.

Kathiann Kowalski. First Energy Critics Say PJM Auction Shows Its Nuclear Plants Aren’t Needed. Energy News Network. June 1, 2018.

Rich Heidorn Jr. FERC Orders PJM Capacity Market Revamp. RTO Insider. June 30, 2018.

Rich Heidorn Jr. IMM: PJM 2018 Capacity Auction Was ‘Not Competitive’. RTO Insider. August 9, 2018.

Rich Heidorn Jr. PJM Seeks to Delay 2019 Capacity Auction to August (2019). RTO Insider. August 13, 2018.

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