Market changes, demand may provide 'significant uplift' in PJM auction results

Multiple changes to the PJM Interconnection LLC capacity market, including an increase to the reserve margin, could provide a "substantial uplift" to upcoming auction results, experts said.

"We think this next auction is definitely going to settle higher than the previous ones ... and that it will have a fair amount of support going forward," Steve Piper, director of energy research at S&P Global Commodity Insights, said during a July 16 interview. "We're up at nearly $200 per MW/day ... which is a substantial uplift."

The second-quarter 2024 Market Intelligence Power Forecast for PJM projects a clearing price of $197.40/MW-day for the 2025–2026 delivery year.

"We're sticking our necks out for a sevenfold increase in this auction," Piper said.

Results for the 2025–2026 baseload residual auction are scheduled to be posted July 30. The bidding window opened July 17 and closed July 23.

Joe Bowring, president of Monitoring Analytics, said PJM's independent market monitor does not comment on auction results prior to the final posting.

Market rebound?

For comparison, PJM in February 2023 announced a systemwide capacity clearing price of $28.92/MW-day for the 2024–2025 delivery year, marking the third consecutive decline in capacity prices.

The 13-state grid operator reported a marketwide clearing price of $34.13/MW-day for the 2023–2024 delivery year.

The clearing price for the majority of PJM's footprint fell to $50/MW-day in the 2022–2023 capacity auction, down from $140/MW-day for the unconstrained regional transmission organization region in the 2021–2022 capacity auction, held in 2018.

Analysts pointed to a "two-layer change" driving a projected sharp increase in clearing prices.

A change in capacity accreditation and the reserve margin are both impacting the forecast, Commodity Insights energy analyst Tanya Peevey said.

"All the resources, even traditional fossil fuels gas and coal, had changes in their accreditation. Some of them went down, some of them went up," Peevey said, adding that this impacts the capacity market because it changes how the demand curve is created.

The changes, in turn, affect "how that supply stacks up because there is less accredited supply," Peevey said. "Then, you're moving up the supply stack in terms of what clears the market."

The capacity market changes come during a strong shift to cleaner energy resources in an era of accelerating electricity demand and weather-driven grid emergencies.

The fast-track reforms, approved by the Federal Energy Regulatory Commission in late January, include an extension of capacity accreditation known as effective load-carrying capability (ELCC) to all generation types. This change in accreditation was developed to better account for correlated outages in the wake of a severe weather event in December 2022 that nearly prompted rotating blackouts, and it most notably incorporates gas-fired resources.

The ELCC is defined by PJM as "a measure of the additional load that the system can supply with a particular generator of interest, with no net change in reliability."

PJM originally designed this methodology to accurately capture the capacity contributions of variable renewable energy resources such as weather-dependent wind and solar, as well as battery storage and hybrid resources, as their systemwide penetration grows across the grid operator's mid-Atlantic footprint.

"The impact of the change in the accreditation and how they're approaching it, the accreditation for all, is significant," Peevey said. "In terms of contributing to peak capacity, it dropped significantly how much traditional fuels and new fuels, fossil fuels and renewables, can contribute to that peak capacity, and that is the driver of a lot of this."

In addition, the reserve margin has increased to 17.8% from 14.8%. The reserve margin is a measure of the capacity needed to ensure reliability of the grid or how much supply is available above peak demand.

"That is taking that whole demand curve and shifting it noticeably to the right, while at the same time, the supply curve is crunching thanks to this basically 'ELCC for all' concept that PJM is putting in place ahead of this auction," Piper said. "So, if you kind of envision those lines, there is only one direction for that intersection of supply and demand to go, and that is higher."

Dominion returns

Dominion Energy Inc. subsidiary Dominion Energy Virginia also signaled that it would bid into the auction after selecting the fixed resource requirement (FRR) option beginning in the oft-delayed 2021 capacity auction.

Under the FRR option, a market participant must demonstrate to PJM that it has enough capacity to serve 100% of the load and load growth in its service territory.

Dominion's FRR selection pulled nearly 17,000 MW of resources and load from the capacity market.

"With PJM's most recent capacity market reforms and assumptions, it makes sense for us to return to the capacity auction, starting with the [2025–2026] auction," Dominion Chair, President and CEO Robert Blue said during the company's first-quarter 2024 earnings call.

"It doesn't change guidance. It doesn't change the way we operate our system or the way we think about the world. In fact, all the auction planning parameters released by PJM ... are quite consistent with our view: We're going to see substantial load growth driven by electrification [and] datacenters for the foreseeable future."