I first wrote about PJM Interconnection’s capacity auction payments increase in August 2024. The resource clearing price at the annual auction went from about $29 for the 2024/2025 delivery year to about $270 for the 2025/2026 delivery year, a nearly ten times or 1000% increase. This reflects a perceived shortfall in generation resources in the region beginning in the 2025/2026 delivery year due to a supply and demand imbalance. The latest proposal from PJM is for a price collar, which includes a price floor and a price cap, a roughly $325/MW-day price cap and a $175/MW-day floor for its 2026/27 and 2027/28 delivery year capacity auctions. According to Utility Dive’s Ethan Howland who has covered the issue:
“The “price collar” proposal would resolve a complaint
filed on Dec. 30 by Pennsylvania Gov. Josh Shapiro, D, over PJM’s capacity
auctions. The next auction is set to be held in July.”
Ratepayers, however, strongly objected to the price floor as
too high. I am one of these ratepayers and I am poor, so I agree. Detractors
have argued that the price floor could raise prices for consumers without any
real reliability benefits.
“PJM’s market monitor also urged FERC to reject the grid
operator’s proposal, partly over the price floor provision. “The inclusion of a
minimum price greater than zero is a radical break from the definition of the
[variable resource requirement] curve since its introduction and does nothing
to resolve the complaint,” the market monitor said.”
“PJM has not alleged — let alone shown — that a price
floor is needed to correct a market flaw and ensure just and reasonable rates,”
six ratepayer advocates said in a filing. “PJM’s price floor would cause
overpayments at different times by requiring customers to pay more than needed
for reliability when adequate supply is available at lower prices.”
“While a narrow band of administratively allowed prices
may inject price certainty in the near term, the impact this proposal may have
on the willingness of market participants to make long-term investments in the
PJM marketplace remains to be seen,” the PUCO office said. “The Ohio FEA is
concerned that confidence in the integrity of the PJM markets, already severely
undermined by years of constant litigation, negotiation, and uncertainty, will
be further eroded.”
“The “price collar” proposal highlights the need for
fundamental capacity market reform, according to American Municipal Power, a
wholesale power supplier. “Despite years of tinkering, [the capacity market] is
failing to produce an adequate supply response at just and reasonable costs to
consumers, AMP said.”
Thus, we can see
that there is widespread disapproval of the price floor. With rising power
demand from AI data centers, more intermittent renewables on the grid, and
other factors, there is a perception that power reliability could be eroded. As
a PJM region ratepayer, I say, why should we have to pay for these issues
caused by tech companies wanting to make more money and renewable energy
developers wanting to get more projects online? Residents should not bear the
costs for businesses, especially very profitable businesses. I say we should
assure residential power at a fair price before we add new power for
businesses. However, there are several parties supporting the price collar
proposal.
“Parties supporting PJM’s price collar proposal include
the Pennsylvania Public Utilities Commission, the New Jersey Board of Public
Utilities, Constellation Energy, Dominion Energy and Duquesne Light.”
“Facing the current rate of load growth and a compressed
auction timeline, PJM’s proposed symmetrical capacity auction price cap and
floor strikes a balance between protecting customers from excessive capacity
costs and incentivizing generation to participate in PJM’s wholesale capacity
markets,” Dominion said.
In Pennsylvania’s
January complaint urging for a price cap they noted:
“Pennsylvania ratepayers face potentially the largest
unjust wealth transfer in the history of U.S. energy markets due to [PJM’s]
capacity auctions,” Pennsylvania said in its complaint. “Three unexpected
developments — (1) significant load growth; (2) the country’s most snarled
interconnection queue; and (3) a compressed capacity auction schedule — have
collided with PJM’s inapt design decisions to produce record high prices that
are ineffective at delivering new power generation.”
“FERC should order PJM to lower its price cap to no more
than 1.5 times Net Cost of New Entry, or Net CONE, and PJM should use that cap
to set the minimum price cap for all locational deliverability areas, according
to the complaint.”
They also warned of potential astronomical two-digit
increases on monthly bills that may offer no power reliability benefit. This,
they said, could undermine trust and confidence in the fairness of PJM’s
capacity market.
In October 2024
the governors of five states, Delaware, Illinois, Maryland, New Jersey and
Pennsylvania, called for PJM to reform its capacity market. The concern is that
the high-capacity prices are not really incentivizing new power projects on the
grid as designed due mainly to the inherent delays in the interconnection
queue, often caused by the difficulty of integrating variable generation like
wind and solar. The governors asked that the capacity auction include
reliability must-run (RMR) units after Sierra Club and other environmental
groups pushed for it. However,
“…Calpine and LS
Power told FERC that they oppose the environmental groups’ “misbegotten” RMR
complaint. However, they said they support resetting the parameters PJM uses in
its capacity auctions, such as how much capacity the grid operator plans to buy
in local deliverability areas.”
They also noted
that PJM’s capacity market has not operated consistently or transparently for a
number of years, which stifles investment. LS Power is considering 2400 MW of
power generation and 2000 MW of battery deployments in the PJM market but is
concerned about the state of the PJM market. PJM asked for a six-month delay so
they can reconfigure the market. They noted they would also include the
resource adequacy benefits of RMRs into the auctions.
“These types of projects require us to develop long-term
capacity market revenue expectations that will underpin the capital
investment,” Hanson said. “However, the lack of stable market rules undermining
price signals and expectations of risk will hinder our ability to deploy the
levels of capital required to bring these projects online.”
In November 2024
ratepayer advocate groups filed a complaint with FERC, seeking to change PJM’s
capacity market design. The rise in capacity costs for consumers from $2.2
billion in the 2024/2024 delivery year to $14.7 billion in the 2025/2026
delivery year for the base residual auction (BRA) is expected to cause consumer
prices to rise by 10-20%. I know that would cut into my budget. Ratepayer
groups have complained that the auctions benefit incumbent generators at the
expense of ratepayers.
“PJM also plans on using a combustion turbine instead of
a combined cycle turbine for its reference technology to help set the capacity
auction’s demand curve and adopting uniform non-performance charges across its
footprint, according to the presentation. It plans to propose conducting its
capacity auction for the 2026/27 delivery year in July followed by one in
December 2025 for the next delivery year.”
This whole
capacity auction issue is confusing to me and many others. As a ratepayer, I
want fairness and reasonable costs. PJM wants new generation to be economical
for generators. The goal of incentivizing new generation needs to be reconciled
with ratepayer concerns. That seems to be the basic problem to be solved. I
will probably report back on this in July when the next capacity auction
happens.
References:
PJM’s
capacity ‘price collar’ proposal sparks market confidence concerns. Ethan Howland.
Utility Dive. March 18, 2025. PJM’s
capacity ‘price collar’ proposal sparks market confidence concerns | Utility
Dive
Pennsylvania
asks FERC to lower PJM capacity price cap to prevent ‘runaway’ costs. Ethan
Howland> Utility Dive. January 2, 2025. Pennsylvania
asks FERC to lower PJM capacity price cap to prevent ‘runaway’ costs | Utility
Dive
5
governors call for PJM capacity market rule changes to reduce ‘unnecessary’
consumer costs. Ethan Howland. Utility Dive. October 28, 2024. 5
governors call for PJM capacity market rule changes to reduce ‘unnecessary’
consumer costs | Utility Dive
Ratepayer
advocates press FERC for PJM capacity market changes, citing ‘crushing’ prices.
Ethan Howland. Utility Dive. November 19, 2024. Ratepayer
advocates press FERC for PJM capacity market changes, citing ‘crushing’ prices
| Utility Dive
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