Higher PJM energy market prices may have led to lower capacity auction bids

PJM Interconnection capacity auction clearing prices for delivery year 2023/2024 came is lower than prices for the past 10 auctions with experts suggesting higher energy market prices, recent rule changes and a shorter timeframe to delivery could have contributed to the price drop.

The capacity auction clearing price for most of the PJM footprint was $34.13/MW-day compared to $50/MW-day for the 2022/2023 auction held in June 2021. That was the third lowest clearing price in PJM's capacity market history, with only the 2012/2013 and 2013/2014 delivery years clearing lower at $16.46/MW-day and $27.73/MW-day, respectively.

PJM does not have much insight into how market sellers determine their unit-specific offers, Stu Bresler, senior vice president of market services, said during a June 21 conference call with reporters.

However, he noted that commodity price "spreads are up – spark spreads, dark spreads, quark spreads – are all up, especially in the forward markets, and so directionally you would expect if market sellers are anticipating higher net revenues in the energy market that they would be able to offer less in the capacity market."

Morris Greenberg, senior manager of North America power analytics with S&P Global Commodity Insights agreed, saying in a June 22 email: "I think the major factor in the low clearing prices was gains in expected energy revenues and in the case of renewables, [renewable energy credit] revenues as well."

He said PJM Tier 1 REC prices are currently around $23-$24/MWh, up from about $15/MWh at the time of the last auction.

"The compressed schedule between the auction and the delivery period may have had an impact as well, as it did last year," Greenberg said.

Auctions are usually held three years in advance of the delivery year and the 2023/2024 auction was originally scheduled to be held in May 2020, but auctions had been suspended while the Federal Energy Regulatory Commission considered approval of new capacity market rules, PJM said in a statement.

"In general, prices are in a reasonable range, we expected a relatively low clearing price for this auction (as well as the next auction in December) compared to the last few years, which makes sense given the energy market conditions," Bill Dugan, director of optimization for wholesale services at Customized Energy Solutions, said in a June 21 email.

He cited Dominion's decision to remove all its Virginia resources from PJM's capacity market, and how "relatively long" the PJM market remains. The MAAC and BGE zones remain constrained as expected, "while ComEd is no longer constrained and appears to be long as of now," Dugan said.

Rule changes, cleared resources

Analysts with Regulatory Research Associates, or RRA, a group within S&P Global, forecast clearing prices for the 2023/2024 delivery year as low as $25/MW-day, driven by several factors including a more restrictive market seller offer cap.

The purpose of a market seller offer cap is to "remove the double-counting of any costs, such as large maintenance costs, that a generator includes in its offer," RRA noted in its first-quarter 2022 Market Intelligence Power Forecast, adding that the cap also "significantly limits the bid potential for generators."

There was an increase of 5,315 MW from existing nuclear units that did not clear in the previous auction, PJM said, adding that solar resources increased 25%, from 1,512 MW to 1,868 MW, while the number of wind resources clearing was down 434 MW to 1,294 MW. The decrease in wind resources clearing the auction reflected a decrease of wind resources that offered in, the grid operator said.

"Renewable energy clearing decreased a bit this year in terms of new entry, which does make sense in terms of lower price expectations, delays in solar resources coming online, Effective Load Carrying Capability implementation lowering capacity ratings, and the relative timeline of this auction," Dugan said.

Natural gas-fired resources clearing the auction increased by 1,685 MW, with more efficient combined-cycle units clearing 3,627 MW more than the last auction and combustion-turbine units down 1,012 MW, according to PJM, which added that combined-cycle units cleared a total of 48,030 MW in the auction and combustion-turbine units 19,080 MW.

"Cleared capacity of steam units (primarily coal) was down 7,186 MW to 27,682 MW, tracking with a decrease of 7,813 MW offered into the auction as a result of coal retirements," PJM said.

There was also a 716-MW decrease in demand response resources that cleared. It was generally predicted capacity prices would be lower, which can dissuade potential DR participants, Peter Cavan, director of market development at Convergent Energy + Power, said in a June 22 email.

Electric Power Supply Association president and CEO Todd Snitchler said in a June 22 statement he was concerned about reliability over the longer term as baseload resources retire.

"While the auction's low capacity clearing price represents a savings for customers in the short term, these results portend real concerns over adequate compensation for resources needed to support reliability in all conditions and looking forward," Snitchler said.