Strong forward power prices should help mitigate the significantly decreased sale price reported for the PJM Interconnection LLC's 2023/2024 capacity delivery auction, industry analysts said.
The marketwide clearing price of $34.13/MW-day, announced June 21, was down 32% from the previous auction's clearing price of $50/MW-day. BMO Capital Markets noted a nearly 50% median decline in all load delivery areas as the 13-state grid operator transitions its fuel mix away from more expensive fossil fuels to lower-cost renewables. It was also the first PJM capacity auction without an expanded minimum offer price rule in place.
But high power futures may dull the lower-than-expected results, BMO, Wells Fargo Securities and Guggenheim Securities LLC told clients in separate notes on June 22.
"This year's auction comes against one of the strongest quark/spark spread backdrops in years," Guggenheim said, referring to the advantageous difference between the wholesale electricity market prices and the production costs of nuclear and gas-fired power.
BMO agreed that "the modest backwardation in forward power prices ... could add some upward pressure to future capacity auctions all things held equal," though nuclear production tax credits may "have a modest downward impact" on capacity sold during the recent auction should Congress pass revised budget reconciliation legislation.
Constellation Energy Corp. and Public Service Enterprise Group Inc.'s competitive power supply businesses may even see net higher EBITDA despite lower capacity prices, Wells Fargo said.
Constellation said in a Form 8-K filing that all of its nuclear, natural gas and oil-fueled plants in the PJM region, totaling nearly 19 GW, cleared the auction. However, the Wells Fargo analysts said revenues associated with the cleared capacity of the Dresden and Byron nuclear plants "are effectively capped via the carbon mitigation credits." They were referring to nuclear subsidies in Illinois.
Vistra Corp. said in a statement it sold about 6.9 GW "at a weighted average clearing price of $37.20 per megawatt-day, equating to approximately $94 million in capacity revenue for the 2023/2024 planning year."
Guggenheim estimated Vistra should see a decrease of about $60 million, and Constellation should experience a decrease of approximately $145 million in their fully merchant power regions as a result of the auction compared to the 2022/2023 portfolio.
Overall, PJM's auction procured 144,871 MW for the commitment period covering June 1, 2023, through May 31, 2024, at a cost of $2.2 billion. That represents a $1.8 billion decrease in capacity costs compared to the auction for the 2022/2023 delivery year. The results will give PJM a 20.3% reserve margin, which exceeds its required reserve margin of 14.8%.
Cleared solar capacity increased by 25%, totaling 1,868 MW, while wind capacity decreased by 434 MW to 1,294 MW. PJM also saw a 7,200-MW reduction in cleared capacity for steam-fired units such as coal-fired generators, thanks to retirements.
America's Power, a trade group advocating for the country's coal-fired power fleet, said in a June 22 statement that the auction results will likely cause even more coal retirements.
"Besides the potential risks to grid reliability, more coal retirements will expose ratepayers to higher electricity prices when gas prices spike and generators cannot shift from gas to coal," the group's president and CEO, Michelle Bloodworth, said. "We continue to urge PJM and other grid operators to value the reliability, resilience and affordability attributes of coal."
The Electric Power Supply Association, which represents competitive power suppliers, said the auction results support about 3.3 GW of new generation and 405 MW of uprates to existing resources. But it raised a note of caution.
"What appears to be developing is a trend where the addition of new supply resources is far outpaced by the retirement of resources that can deliver reliable power in the PJM [base residual auction]," the group said. "Oversimplifying the results of the auction by cheering the lower price for capacity fails to recognize that there is a cost to ensuring the delivery of reliable power, and the most cost-effective way to deliver it is through well-functioning markets, not from picking winners and losers among the resources that participate."
PJM is one of three regional grid operators in the Eastern U.S. that runs mandatory capacity auctions to secure sufficient power supplies at all times. Similar to the ISO New England, PJM holds its capacity auctions three years in advance of delivery of supply. Clearing prices are set by the highest marginal bidder.
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