PJM saw prices spike in its just-completed auction for future grid capacity, a turnaround that signifies challenges for the mid-Atlantic grid operator in managing its changing generation mix. But it's a bounty for the power plants, wind and solar farms, and demand response providers that bid into the market. 

On Wednesday, PJM released results of its 2021/2022 Reliability Pricing Model Base Residual Auction, the country’s largest market for grid capacity, or energy to be delivered in future years to meet projected needs. And as expected, prices for these future megawatts were much higher than in previous years — $140 per megawatt-day for much of the PJM footprint, compared to $76.53 per megawatt-day in last year’s auction, or $80 to $100 from its 2016 auction.

This is an even bigger jump than predicted by Wood Mackenzie’s Power and Renewables team, which projected in a recent report that PJM’s capacity auction would clear at a territory-wide price of $103/megawatt-day, a 35 percent increase over last year’s auction. 

But there was little confusion over what was causing the price spike. Wood Mackenzie pointed to several factors, including well-anticipated ones like long-planned transmission investments, as well as less predictable ones, such as the retirement of baseload nuclear and coal-fired power plants, and state policies such as the nuclear power subsidies approved in Illinois and New Jersey this year. 

More recently, the bankrupt generation business of utility FirstEnergy announced plans to close its three nuclear reactors in PJM territory by 2021, adding to the roster of capacity resources exiting the market. 

Given these factors, “we feel this auction was very successful, very competitive, and very consistent with expectations,” Stu Bresler, senior vice president of operations and markets, said in a Wednesday conference call. 

The auction cleared 163,627.3 megawatts of unforced capacity, representing a 22 percent reserve margin — well above PJM’s target of 15.6 percent. This excess in reserve capacity is often cited by clean energy groups as a reason to reject some of PJM’s recent policy proposals, which would have the effect of supporting economically struggling nuclear and coal power plants in its region, and instead allow more competitive resources to take their place. 

But Bresler noted that PJM’s auction showed a great deal of diversity in resources. While natural-gas-fired power plants make up the majority of PJM’s new energy and capacity resources, the auction also saw a significant increase in demand response and energy efficiency, as well as wind and solar. 

A total of 11,126 megawatts of demand response cleared, up 3,305 megawatts from last year’s auction, and the 2,832 megawatts of energy efficiency that cleared represented an increase of about 1,100 megawatts from the previous year. Wind power cleared 1,417 megawatts this year, up 529 megawatts from the previous year, and solar increased more than fourfold, with around 570 megawatts clearing.

At the same time, the share of coal-fired power plants clearing the auction also increased from the previous year, Bresler sad. “The death of coal has been greatly exaggerated. As we’ve seen, they just kind of hung in this year.” 

This is also the second year that PJM has split its capacity auction into two seasons, summer and winter, rather than as a single annual period. This change was put in place after the 2014 polar vortex, and was meant to ensure adequate supplies of capacity for both hot- and cold-driven energy demands. But it has also reduced opportunities for summer-centric resources, such as air-conditioning-based demand response. 

Still, most of the demand response and energy efficiency that was offered this year was cleared in the auction, Bresler said. And of the roughly 14,000 megawatts of DR and EE cleared capacity, almost all of it was offered as an annual product, with only about 600 megawatts consisting of summer-only products paired with winter wind capacity, he said. 

“I was a bit surprised” to see this, said Bresler, noting that the results seem to counter fears from demand response and clean energy providers on how the seasonal split would affect their competitiveness. “I question whether we really have a seasonal issue here.”

Somewhat paradoxically, PJM’s track record of falling prices in its energy markets is also putting upward pressure on capacity prices, given that generators may seek to raise their capacity bids to make up for losses in the energy market.  

Bresler noted that capacity costs still make up less than a quarter of the wholesale cost of electricity across its region, which means that “this increase in capacity prices won’t be enough to overwhelm the low prices” for the 65 million people served by its market. “But there is a relationship between the two.” 

Capacity auction prices varied from region to region across PJM, with higher prices in regions with more transmission investment needs or a more challenging mix of resources being retired and coming online. 

Results From PJM's 2021/2022 Reliability Pricing Model Base Residual Auction