What’s Up with PJM’s Massive Capacity Payments Increase?

 

     I don’t want to pretend that I know exactly how capacity auctions work but I do want to understand the implications of this particular capacity auction since I may be affected by higher power prices which I cannot afford at present. PJM is one of the largest power markets in the U.S. 

     Apparently, a capacity shortfall is looming in the PJM regional power market. This simply means we need to build more power plants to ensure future electricity supply. Wind and solar are not ideal in this region so those resources are often inadequate. In fact, fuel oil makes as much or more electricity in the region than wind or solar. Coal plants and older gas plants continue to be retired. Most new gas plants face opposition and potential delays. 

The higher prices in the capacity auction are meant to entice companies to build new power generation. But, will that be enough to do it? Raymond Gifford of Pro-CO2 group CFact ponders:

 

“As an investor, do I sink hundreds of millions or billions of dollars into an asset whose capacity payment is only assured for three years? Particularly for dispatchable thermal resources, would high-capacity payments in three years trigger a commitment of capital to be earned back over decades when policies and political forces aim to strand that asset sooner rather than later?”

 

It seems to put investors in a precarious position and consumers in an unenviable one.

 

     Meredith Angwin has chimed in about the PJM capacity auction. I read her great book, Shorting the Grid, a few years back, where she explained RTO’s, capacity auctions, and other aspects of power generation assurance and pricing. She reiterated some of those ideas in a recent Substack article:

 

“In Shorting the Grid, I describe the grid as consisting of two grids: the power grid and the policy grid. The power grid consists of generators, substations, wire and dispatch centers. The policy grid is the rules, regulations, payments for generators, subsidies and so forth.”

“The physical grid is ultimately ruled by physical laws, while the policy grid is ruled by laws, regulations and subsidies.”

 “On most RTO-type grids, there are two main auction markets in the policy grid.”

 “• The Energy Market pays a generator for the kWh that the generator puts on the grid. These payments are usually recalculated every few minutes or every half-hour.”

 “• The Capacity Market pays a generator for being available to the grid. The payments are arranged years in advance and are calculated in terms of MW-Days.”

 

     She sees the problem as one of simple supply and demand imbalances. Fossil fuel generation is retiring faster than new generation is able to replace it as demand continues to increase. The retirement of the 2GW gas-fired Mystic Generation Station in Massachusetts on June 1, 2024, is an example. On-going electrification and new demand from AI/machine learning are expected to keep demand growing. Renewables have had difficulty being connected and have not added as much generation as hoped. That is the physical grid part, that forward demand is outpacing supply.

     She lists six issues affecting the capacity auction prices: 1) Transmission – financing and permitting issues have slowed transmission additions and upgrades, 2) Low energy prices – PJM energy prices dropped from very high prices in 2022 (mostly a result of Russia’s invasion of Ukraine). Prices have dropped by half. The big drop in natural gas prices from 2022 to 2023 is one factor. Another is renewables dropping the clearing price in previous auctions for all generators since they can bid zero due to the fact that they are heavily subsidized. 3) Revenue requirements – lower energy payments to generators means they are likely to bid higher in capacity markets, 4) Capacity auction delays – this is common but also has to do with a three-year delay due to “FERC’s June 2018 decision finding that PJM’s minimum offer price rule (MOPR) unfairly suppressed capacity prices.” 5) MOPR, Minimum offer price rule – MOPR does not allow subsidized resources such as wind, solar, and sometimes nuclear, to consider their subsidies in their capacity bids. Thus the ‘cleared’ capacity of wind and solar is very low, just 1% for each. 6) Market reforms at PJM – PJM has been trying to change market accreditation so that generation sources could not bid at their nameplate capacity. Solar and wind have low capacity factors compared to natural gas, coal, and nuclear, so they cannot provide as much power due to intermittency and variability. Thus, this change was needed.  In February 2024 FERC accepted new changes in PJM’s capacity rules. She writes:

 

“Briefly speaking, PJM will now use ELCC (Effective Load Carrying Capability) for capacity bids for all generation resources. ELCC is the MW of a generation unit which is available when needed, particularly when the grid is stressed. This change will be fine for nuclear but will be a problem for weather-dependent resources.”

 

Utility Dive's Ethan Howland writes that according to Stu Bresler, PJM executive vice president for market services and strategy:

“Bids were about 6,600 MW lower than in the last auction due to power plant retirements and must-offer exceptions for power plants heading towards shutdown. Also, estimated peak load increased to about 153,000 MW from 150,000 MW”

     Gas-fired generation accounted for 48% of the cleared capacity, with nuclear at 21%, coal at 18%, demand response at 5%, hydroelectric at 4%, solar and wind at 1% each, and 2% from other resources. Howland notes that it is not yet clear how this rise in capacity auction prices will affect consumers, but it is seen to better reflect supply and demand dynamics than previous auctions.

     Clean energy trade group Advance Energy United claims that the reason for the price increases is that PJM did not plan for the energy transition adequately by planning and adding more transmission and better interconnection. PJM says that the problem is more about new generation taking longer to build due to financing, supply chain, and siting and permitting issues. They say they are working on reforming the interconnection process.

     PJM normally holds annual capacity auctions, referred to as base residual auctions, to secure capacity three years in advance. However, the next base residual auction for the 2026/2027 delivery year, is scheduled in December 2024. It should be interesting what that auction, just 4 months from now, reveals.

 

 

References:

Ten Times as Expensive at PJM. Meredith Angwin. The Electric Grandma. Substack. August 3, 2024. Ten Times as Expensive at PJM - by Meredith Angwin (substack.com)

2025/2026 Base Residual Auction Report. July 30, 2024. PJM. 2025-2026-base-residual-auction-report.ashx (pjm.com)

PJM capacity prices hit record highs, sending build signal to generators. Ethan Howland. Utility Dive. July 31, 2024. PJM capacity prices hit record highs, sending build signal to generators | Utility Dive

PJM Capacity Auction Result Promise A Future Conflagration Among All Involved in Ensuring Our Energy Security. Raymond Gifford, CFact. Natural Gas Now. August 18, 2024. PJM Capacity Auction Result Promise A Future Conflagration Among All Involved in Ensuring Our Energy Security (substack.com)