On June 9th the Federal Energy Regulatory Commission (FERC) issued an order mostly approving the PJM Interconnection LLC’s changes to their forward capacity market, formally named the Capacity Performance Proposal. This proposal was a direct response to the problems the PJM Interconnection experienced during the 2014 polar vortex when as much as 22% of expected electric generation did not perform as expected, much of it due to the inability of natural gas generators to receive the natural gas needed to operate. This new capacity market is going to impact customers in many ways. We will attempt to address some of those potential impacts here, understanding that this is all very new and that there could be many unintended consequences from the changes. These consequences will reveal themselves over time but will start with the 2016-17 and 2017-18 voluntary Transition Incremental Auctions that will occur in late July and early August, to be followed by the 2018-19 Base Residual Auction that starts on August 10, 2015.
There are three main components to the new capacity market:
- Capacity Performance Resource:
While it will be phased in over several years, capacity resources will generally be subject to stronger performance expectations and standards. Intermittent capacity resources such as renewables, demand response, and energy efficiency will be allowed to be combined to offer capacity as an aggregated Capacity Performance Resource. - Increased Penalties and Bonuses:
Capacity Resources that do not attain their performance metrics during system emergencies will generally incur increased penalties while higher performance metrics exceeding target will be eligible for bonus payments. - Net Cost of New Entry (CONE) Based Default Offer Cap:
CONE is defined as the operating margins a new generating resource would need to earn in the capacity markets to be economically viable. The new rules allow capacity resources to offer up to the CONE without specific unit review and will allow resources to bid above CONE if they can demonstrate that such an offer is supported by their costs. This represents a potential increase in the ceiling that capacity prices could achieve through the auction process.
Impact To Customers
These rules are going to be implemented over time so it is difficult to gauge what the exact impact will be. Just a cursory understanding of the above would indicate that capacity prices in PJM are most likely to rise though it cannot be said with certainty.
One of the benefits of the capacity market in PJM over the last few years is that customers have been able to know what their capacity charge would be 3 years out as the auctions were held every May for the capacity period 3 years out. While that is still the case, the aforementioned Transition Incremental Auctions in late July and early August could affect the pricing already “locked” in by customers in electric contracts past June 2016.
These transitional incremental auctions for 2016-17 and 2017-18 will allow generators to offer up to 60 and 70% respectively of their resources that will meet the new reliability requirements, regardless if the resource participated in the base residual auction for the same period. The initial auctions prices for many zones in PJM for 2016-17 and 2017-18 are $59.37 MW-Day and $120.00 MW-Day respectively. With the clearing cap price of the incremental auctions set at $165.27 MWDay (2016-17) and $210.83 (2017-18) MW-Day, it is quite possible that customers’ capacity prices will rise from what was expected. This could happen because suppliers will incur higher costs to secure capacity for their customers and will then invoke the Change of Law contract clause that is present in almost all electricity contracts.
We do not know that this will, in fact, happen. We believe there is a chance that capacity prices will change and that the path of least resistance is higher. Every customer case will be different, but we do want all of our customers to be aware of this development. We will keep you informed as the auctions occur, and the results and impacts become more in focus. Please do not hesitate to contact us with any questions on this important development.
