The popular news story this summer in PJM has been the auction that set capacity prices for the future months of June 2022 through May 2023. This is notable because there has not been an auction of its kind for about three years. There had been a constant disagreement between the Federal Energy Regulatory Commission (FERC) and PJM, about setting the price for capacity, causing a delay. The long delay created hesitancy in how capacity was to be valued in any contract that would be a forward electricity contract. Like other commodities, unpredictability causes risky pricing leading to higher costs. Before reviewing the auction details, let’s go over capacity and its importance to electricity customers.
What is meant by Capacity?
PJM Interconnection (PJM) is an entity whose main objective is to provide and ensure that the grid can meet the demand of electricity placed on it. During the seasons when demand is highest, summer’s hot days and winter’s freezing days, PJM requests electricity from generators that are standing by to keep up with the demand. Capacity is precisely that, the commitment that an energy generator will provide electricity for a needed period of time. A competitive auction sets the price for capacity in the PJM system.
Capacity can be compared to an insurance payment made ahead of time to make sure that the energy supply and the demand are balanced. When the utility company or an Energy Supply Company (ESCO) offers service to a client, about 20%-40% of the price is in relation to capacity, and distinctly depends on the utility area. For instance, capacity cost is significantly higher in PSE&G (NJ) than that of FirstEnergy (OH). For a client who is paying 10c/kWh for electric service, around 2.0 to 4.0c/kWh of that price is capacity payment which the utility company or the ESCO pays PJM.
Altogether, capacity price for June 2022 to May 2023, vastly decreased across most of the PJM area by 64%. The average pricing of capacity decreased from $140 per MW-day to $50 per MW-day. The following industries had the most increase in clearing capacity, nuclear power plants, natural gas-fired plants and renewable power. On the other hand, hardly any coal plants were able to clear the recent auction. Experts in the field have gathered a few factors that caused the drop in the price of capacity.
- Projection of a lower load, indicating that electricity supply will surpass the demand in the next few years
- Reduced Cost of New Entry, meaning that the expense of building and placing a new generating property into service costs less
- Bids in the auction offering lower prices from generation owners
Although most regions of PJM had a decrease in capacity prices, some areas had pricing above $50 per MW-day. Figure 1 shows the specific areas.
With capacity prices being lower, that should lead to retail electricity pricing also being lower. Even so, bullish power and gas prices have recently sparked a non-welcoming opinion on lower capacity prices. The prices set by the most recent auction set prices through May 2023. Considering it took 3 years for a capacity auction, an accelerated auction schedule was generated to compensate for the auctions that didn’t take place in the previous years. The following schedule is the timeline created:
The capacity prices of future electricity pricing will be determined on the results of the most recent auction, and the other few auctions that have been scheduled. In addition, factors that are now driving today’s capacity prices are completely different than those of three years ago. Today’s economy, the new presidential administration, and the comparison of supply and demand are not the same as May 2018.
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