PJM capacity prices jump under performance rules

OREANDA-NEWS. August 24, 2015. Capacity prices rose by 38pc to almost \\$165/MW-day across much of the PJM Interconnection during its first auction to implement new "capacity performance" requirements that impose large penalties on resources that fail to generate electricity when dispatched.

PJM today posted results from the auction, which it held earlier this month to procure capacity for the June 2018 - May 2019 delivery year. Analysts expected a higher clearing price in the auction because the capacity performance rules will require many plants to invest in reliability upgrades and take on the risk of non-performance penalties that will hit \\$3,650/MWh during emergency conditions.

The auction results yield a total capacity payment to generators and other resources in 2018-19 will be \\$10.9bn, an increase of 45pc over last year's auction payout of \\$7.5bn for 2017-18.

PJM worked to procure at least 80pc of its capacity for the 2018-19 delivery year with resources that meet capacity performance requirements. The clearing prices was \\$164.77/MW-day across most of the grid, with a higher price of \\$225/MW-day in the eastern mid-Atlantic region and \\$215/MW-day in the ComEd zone that includes Chicago and parts of northern Illinois.

The auction price for the remaining 20pc of "base capacity" that face easier performance requirements was \\$150/MW day across most of the grid, with a higher price of \\$200/MW-day in Illinois and \\$210/MW-day in the eastern mid-Atlantic region.

Those prices compare with a clearing price of \\$120/MW-day last year, though PJM expects some of those higher costs for capacity will be offset by lower energy prices that come from improved generator reliability. The auction procured about 2,919MW of new generating capacity and 578MW from uprates.

The auction cleared about 11,000MW of demand response, an increase of about 110MW from the prior auction.

Modern coal plants, nuclear plants and newer gas plants with firm fuel supplies should see the largest financial benefits from capacity performance, as those resources should be able to meet the new requirements without making costly upgrades. Older plants with high outage rates and gas plants without firm fuel may need to make costly investments if they cleared the auction.

PJM came up with the capacity performance market design because of its concerns that capacity resources did not have enough incentive to perform during emergency conditions. During a bout of severe cold weather in January 2014, about 22pc of the grid's capacity resources had been forced off line but faced no financial penalties for their non-performance.

Analysts ahead of the auction had predicted the clearing price for capacity performance would range from \\$150-200/MW-day. The investment bank Tudor Pickering Holt earlier today had projected the clearing price would be \\$175/MW-day, with the greatest upsides for merchant power plants owned by Exelon and Dynegy.

Fixed costs for US nuclear power plants are commonly assumed to be \\$260-\\$315/MW per day. Fixed operation and maintenance costs for coal plants are estimated at \\$110-\\$219/MW-day.

PJM's capacity performance market design has been highly controversial, drawing criticisms from load-serving entities that the grid could find ways to improve reliability at much lower costs. Federal Energy Regulatory Commission chairman Norman Bay opposed the changes in part for using a market design that could allow a resource to "profit from non-performance."