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PJM Capacity Auction Changes to Impact Customer’s Overall Electricity Invoice

           US - Energy News
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On October 2nd, PJM filed a proposal with the Federal Energy Regulatory Commission (FERC) to answer the June 2018 FERC ruling that declared the PJM Capacity Market as “unjust and unreasonable” as currently designed.

While the PJM market in general has experienced lower electricity prices the last few years, the capacity market price that all customers pay has generally been higher. The capacity price is different in each region, and the PJM/ComEd capacity price has been noticeably higher for the delivery periods between 2018 and 2021 (see Chart 1). These high capacity prices have offset a good portion of the benefits of lower electricity prices. Depending on a customer’s load factor, capacity prices can contribute anywhere from .75 cents per kWh to 3.5 cents per kWh on a commercial invoice.

 
 

Over the last few months there has been an ongoing debate as how to proceed going forward regarding the PJM capacity market. One of the appeals of the PJM capacity market is that they have set capacity prices by having auctions three years out, which allowed both customers and generators to have the ability to respond to those price signals. Higher prices for capacity (everything else being equal) has allowed efficient generators to invest in additional plants and given customers the chance to offset some of their costs by participating in demand response programs.

PJM is now undergoing its third iteration of capacity price/auction changes in the last five years. This regulatory uncertainty is something participants in the PJM market must be aware of. The issues causing the need for rule changes highlight the conflicts between Regional Transmission Organizations (RTOs) who operate across state lines, their federal regulator (FERC), and the individual states that can create their own energy legislation.

The primary pressure for PJM to change the rules for its capacity market has come from the fact that states have been subsidizing both renewable and nuclear electricity generation, distorting the markets for both capacity and energy. We have seen this in Illinois with Zero Emission Credits (ZECs) for nuclear electricity plants and the subsidies for new solar electricity generation. New Jersey has also recently enacted a program for Zero Emission Credits for its nuclear electricity generating fleet. New York (not in PJM) has also passed nuclear electricity subsidy legislation. The subsidies allow the units to continue to run (nuclear) and be built (solar), though on a purely economic basis they are not profitable. The states have agreed to these subsidies for both environmental and reliability reasons. This becomes an issue in the capacity market since the subsidized units can now bid a lower capacity price to make certain it clears the capacity market. So, the problem for PJM is how to accommodate the wishes of individual states in a multi-jurisdictional electricity pool with a federal regulator (Federal Energy Regulatory Commission), while trying to maintain some semblance of a free market. The final PJM market design is also important since there have been many recent federal appeals court decisions affirming the decisions by the legislatures in New York and Illinois, making the landscape a bit more permanent.

 
 

So, what does this all mean? FERC specifically asked that PJM revamp the methodology around their Minimum Offer Price Rule (MOPR). This rule sets a floor price for the PJM capacity auction to prevent generators from artificially depressing the capacity auction price. While the new PJM proposal maintains the MOPR concept for all fuel and technology types for existing and new resources, it does offer a unit specific carve-out option for subsidized resources that do not wish to be limited by MOPR.

PJM believes that the proposal will fulfill the twin goals of having a competitive capacity market while ensuring that the costs associated with state actions are borne by the states taking those actions. Reply filings to the PJM capacity submission are due by November 6th, and FERC is expected to approve, amend or reject the PJM proposal in January. FERC has granted PJM’s request to delay its Annual Base Residual Capacity Auction from May 2019 to August 2019 since imminent rule changes are expected.

Our own instinct is that the new rule changes will result in higher capacity auction prices, but it is very important to see the final filing rules before trying to gauge the impact on capacity prices. We will endeavor to keep our readers apprised of this regulatory risk.

Analyst David Mousseau
Source PJM, S & P Market Intelligence, Utility Dive, and RTO Insider


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