PJM Capacity Auction: 2019/2020 Delivery Year

The 2019/2020 planning year for the PJM capacity auction was recently completed. Below is a review of the results in PJM and what you can expect in the future.

First, what is Capacity and Capacity Performance?

PJM defines capacity as a commitment by a power supply resource, such as the utility or electricity supplier, to provide energy for a certain period of time. The capacity market, called the Reliability Pricing Model (RPM), ensures the grid will be reliable for the long-term. This is done by procuring the capacity needed to meet predicted energy demand three years in the future.

Another factor of the capacity market is Capacity Performance (CP). PJM defines this as a “pay-for-performance” requirement. Generators must meet their commitments to deliver electricity whenever PJM decides they are needed, especially during power system emergencies. The concept is similar to the concept of parking spaces at the mall, for example. There are enough spaces built to be filled at its busiest time (e.g. Black Friday), but that doesn’t mean they will be used all the time. However, the spaces are always there when needed.

According to PJM, this tool could reduce the energy portion of electricity bills. Lower energy settlement prices may be expected to offset the higher capacity costs and produce overall savings ultimately during extreme temperatures.

Key themes of the PJM Capacity Auction

The underlying theme of this year’s auction was lower capacity clearing prices compared to last year. The Eastern Mid-Atlantic Area Council (MAAC) which includes New Jersey, Delaware and eastern Pennsylvania, cleared at $119.77per MW/day this year. This is a big drop of over $100 per MW/day compared to the clearing price last year at $225.42 MW/day. The Commonwealth Edison (ComEd) zone in the Greater Chicago/Northern Illinois area saw a clearing price of $202.77 MW/day.This is down about $12 compared to the clearing price last year at $215 MW/day.

Possible drivers behind the price reductions:

• About 5,200 MW of new combined cycle natural gas-fired stations cleared in this auction.
• The overall reserve margin for 2019/2020 is 22.4%. This means there is extra capacity in the amount of 22.4% of expected peak demand. That compares to an installed reserve margin target of 16.5%. This shows that there will be ample supply for 2019/2020 capacity committed to serve load in the PJM region.
• Low demand is forecasted going into the auction. The target reliability requirement for the 2019/2020 Base Residual Auction (BRA) is 158,984 MW. That is 1,624 MW (1.0%) lower than the target reliability requirement of the 2018/2019 BRA of 160,607 MW.

Another clear theme of the auction includes an increase in renewable resources, especially wind and solar, that were offered and cleared. In contrast to 857.2 MW of wind resources that were offered and cleared in the 2018/2019 BRA, 969 MW of wind resources were offered into and cleared the 2019/2020 BRA. As for the solar resources, in contrast to 183.7 MW of solar resources that were offered into and cleared the 2018/2019 BRA, 335 MW of solar resources were offered into and cleared the 2019/2020 BRA.

What’s to Come?

Given these results, there should be ample resources for the 2019/2020 delivery year. There should also be a large amount of economic new entry, resulting in lower capacity prices for this planning year. This is a stark contrast to the clearing prices seen last year. Since the demand factor can be meaningful, a lower capacity price can offset some of this cost. But another component that is deterministic of the overall capacity cost is the Capacity Peak Load Contribution (PLC). This is assigned to each customer based on their prior year’s usage during peak times.

To manage the PLC that will help manage capacity costs for your business, contact your Business Development Manager to discuss options.