How PJM Capacity Performance Prices Will Impact Your Electric Bill

On June 9th 2015, the Federal Energy Regulatory Commission approved PJM’s Capacity Performance proposal to reform the capacity markets. The reforms established, on a phased-in basis, a new capacity product called “Capacity Performance,” which is designed to strengthen electric grid reliability.

As PJM CEO Terry Boston states, “Two consecutive cold winters with natural gas interruptions and the rapid pace of coal retirements have put considerable pressure on the system.”

How Does Capacity Performance Work?

Capacity Performance will help to ensure reliability of the grid by paying only those generators that deliver on their promises and imposing financial penalties on those that do not. Because Capacity Performance reforms put power plant owners at risk of penalties if they don’t operate when needed, the reforms are expected to result in significant investments in power plants across PJM. Generators will have to invest hundreds of millions of dollars to harden their power plants against extreme weather and ensure they have sufficient fuel on hand to supply electricity in all conditions, thereby reducing outages during extreme weather and ultimately benefiting customers.

Capacity Performance Prices For 2016 And Beyond

The first capacity auction to include the new Capacity Performance requirement was the 2018-2019 Base Residual Auction, which concluded on August 14, 2015. Capacity Performance prices cleared at $164.77/MW-day for all of PJM with the exception of COMED and the Eastern MAAC delivery areas (PSEG, JCPL, PECO, AECO, DPL, RECO), which cleared at $215/MW-day and $225/MW-day, respectively. Overall, this auction delivered strong results, as 166,837 MW of capacity cleared the auction with a reserve margin 4% higher than the 15.7% requirement.

The capacity results include nearly 3,500 MW of new generation, which consists of almost 3,000 MW of new gas-fired generation and over 500 MW of uprates to existing generators.

Following the 2018-2019 Base Residual Auction, two subsequent transitional auctions were also held for the 2016-2017 and 2017-2018 planning years. The 2016-2017 transitional auction cleared at $134/MW-day for all of PJM, which was below the market cap of $165.27/MW-day. The clearing price for the 2017-2018 transitional auction also cleared below the market cap, coming in at $151.50/MW-day compared to the market cap of $210.83/MW-day. The chart below summarizes the incremental capacity costs—which are additive to the Base Residual Prices for PY 2016-2017 and 2017-2018—for the 2016-2017 and 2017-2018 planning years, along with the clearing price for the 2018-2019 Base Residual Auction:

Why Capacity Costs Matter to Electric Customers

Capacity is typically the second largest component of a customer’s electricity supply cost, which is why the changes are important for customers to understand. The capacity planning year runs from June 1st to May 31st each year, and a customer’s Peak Load Contribution (PLC) changes annually, based on PJM’s five coincident peak days and five highest peak hours of system demand each year. A customer’s capacity cost per MW-day is usually driven by high PLCs relative to the average demand. The ratio of the average demand to capacity PLC is known as capacity load factor.

Constellation offers solutions to help you manage the increased costs resulting from these reliability-related reforms and help you better manage your energy use, such as Peak Response, Demand Response, Efficiency Made Easy, Energy Efficiency and Distributed Energy products (solar, back-up generation, combined heat and power, and fuel cells). Customers with capacity load factors less than 50% are generally good candidates for Peak Response or Demand Response programs.

For more information on how these products may complement your energy procurement plan or how the PJM Capacity Performance reforms may impact your business generally, please reach out to your Constellation sales representative.