PJM auction sees power prices soar under new reliability rules

By: Jeffrey Tomich |

Millions of electricity users throughout the Mid-Atlantic and Midwest will pay $3.4 billion more to keep the lights on in extreme conditions three years from now following an auction run by the operator of the nation’s largest electric grid to ensure reliability.

Results of PJM Interconnection’s annual capacity auction for 2018-19 were released late Friday. This year’s auction was delayed by three months to get federal approval of new rules in response to the fallout from 2014’s polar vortex, when power plants failed, natural gas supplies were strained and power prices soared.

Utilities in PJM are required to secure enough power plant capacity three years in advance to meet projected peak demand. The lead time is meant to provide time to build or upgrade power plants if necessary.

The controversial new “capacity performance” rules approved by the Federal Energy Regulatory Commission in June are intended to provide assurances that power plants run when they’re needed the most (Greenwire, June 10). The rules establish penalties for units that don’t perform. And owners of the most reliable units can earn bonuses.

As expected, the new rules contributed to higher auction clearing prices across PJM’s 13-state footprint. Throughout most of PJM’s territory, the clearing price was $167.44 per megawatt-day (MWd), or almost 40 percent higher than last year.

In two pockets of PJM’s territory, prices surged above $200 per MWd. Those areas include the Chicago area and northern Illinois, where capacity imports were limited by transmission constraints. The eastern edge of PJM — Philadelphia, New Jersey and the Delmarva Peninsula — also saw higher prices.

Stu Bresler, PJM’s vice president of market operations, said the clearing price for most of PJM’s footprint was within the range expected by Wall Street analysts. Even higher breakout prices weren’t wholly unexpected.

“That is always a good thing because it speaks to the transparency of information,” Bresler said on a conference call Friday afternoon.
Cost-benefit

In all, consumers across PJM will pay $10.9 billion for capacity in the 12 months starting June 1, 2017, up from $7.5 billion for the previous year. The $3.4 billion increase represents the midpoint of the $2 billion to $5 billion increase projected in an joint analysis by PJM and its independent market monitor, Bresler said.

“Three and a half [billion dollars] literally falls smack in the middle of that range,” he said.

Supporters of the new standards said the benefits of ensuring lights stay on during events such as the polar vortex outweigh the additional cost.

Specifically, PJM officials said the capacity performance rules will mitigate the potential for and magnitude of energy price spikes during extreme events and will minimize “uplift costs” when the grid is stressed.

“The price signals and the incentive for investment given the added responsibility that these resources taking on, we believe it’s going to be extremely important for reliability,” Bresler said.

But critics wasted little time pointing out that the parties most guaranteed to benefit from capacity performance rules are generators — particularly those in areas where capacity prices jumped most — that will reap hundreds of millions of dollars in extra revenue.

In a Friday evening research note, Evercore ISI analyst Greg Gordon summed up the 2018-19 auction for generators, writing that “everyone is a winner” compared with the previous year’s auction. He listed Exelon Corp., Dynegy Inc., NRG Inc. and Calpine Corp. among the biggest beneficiaries, as they own generation in zones with the highest prices.

The Chicago-based Citizens Utility Board, a utility watchdog group, estimated that a typical Commonwealth Edison delivery customer in northern Illinois could pay almost $100 a year more during the 2018-19 period than the customer pays now, with no assurance that the extra payments will bolster reliability as promised.

“This price spike is one more red flag that the rules governing the capacity auction open the door for power generators like Exelon, NRG and Dynegy to make windfall profits,” the group said in a statement.
Illinois debate

The capacity auction results also loom large at the Illinois Capitol, where Exelon Corp. is pressing lawmakers to approve a bill that would prop up its home-state nuclear fleet, the largest of any state in the nation.

For nearly two years, Chicago-based Exelon has threatened to close as many as three of its Illinois nuclear plants, which it says are losing money because of financial pressure from relatively inexpensive natural gas and subsidized wind energy.

Two of the three nuclear plants in question are in PJM, and neither cleared the 2017-18 auction held in May 2014.

The company today announced that the Quad Cities plant, the 1,819 MW plant facing the most immediate danger of being permanently shut down, also didn’t clear the most recent auction. Two other Exelon nuclear plants, the Oyster Creek plant in New Jersey and Three Mile Island in Pennsylvania, also didn’t clear.

Last week, an Exelon executive said the dual-unit Quad Cities plant lost $350 million over the past five years, and some analysts project steep losses again this year. It is anticipated, given the results of the PJM auction, that the company will announce the plant’s closure later this year when it faces a deadline to inform the grid operator about availability for the 2019-20 auction (EnergyWire, Aug. 20).

Exelon also faces a decision in September to fuel one of the two reactors for 24 months as it normally does, or just 12 months, which could allow the company to idle the plant in the spring of 2017 when it is no longer obligated to run.

While Quad Cities didn’t qualify for capacity payments in 2018-19, higher prices revealed Friday should mean hundreds of millions in additional revenue for Exelon’s Illinois nuclear fleet — a point that opponents of the company’s proposed low-carbon portfolio standard will drive home with legislators as energy policy discussions pick up later this year.

Exelon is also expected to benefit from two “transitional” capacity auctions this month for the 2015-16 and 2016-17 periods.

“We will consider auction results, along with other data points, including EPA’s Clean Power Plan, as we make decisions about the future of these critical long-life assets,” Chris Crane, Exelon’s chief executive, said in a statement.
2-year transition

The 2015 auction (for 2018-19) is the first of a two-year phase-in of capacity performance rules. This year, at least 80 percent of capacity that cleared the auction — including generation, demand response and energy efficiency — had to meet the new standards. The remaining 20 percent needed for reliability was known as a base performance product and not subject to the rules.

Throughout most of PJM, base capacity cleared at a narrower-than-expected $15 discount, Bressler said.

In all, 167,000 MW cleared the auction for a reserve margin of 19.8 percent. That exceeds PJM’s required reserve margin of 15.7 percent. The total included 2,900 MW at five new natural gas-fired plants spread across the 13-state area.

More than 11,000 MW of demand response cleared the auction, up about 10 percent from last year, according to PJM. But most of it was base capacity and not subject to the capacity performance rules. By contrast, less energy efficiency (1,250 MW) cleared the auction, two-thirds of it as a capacity performance product.

More than 14,000 MW of renewables cleared the auction. But that value represents nameplate value of the generation resource. Wind and solar are discounted for capacity because they are intermittent.

John Moore, a senior attorney for the Natural Resources Defense Council’s Sustainable FERC Project, said Friday that demand response, energy efficiency and renewables have the potential to play a larger role in future auctions and could help keep price increases in check for consumers.

The extent to which those non-generation resources are a factor, however, hinges at least partially on the pending Supreme Court demand-response ruling, on wind energy resources getting more than 13 percent credit as capacity resources, and on improved realization of the potential of energy efficiency (EnergyWire, May 5).

“In particular, I think there’s a lot of energy efficiency that’s being left on the table,” he said.

PJM auction sees power prices soar under new reliability rules