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PJM Capacity Prices Nearly Double In Most Territories

  • June 12, 2018

PJM capacity prices nearly or more than doubled in 17 of the 27 locational delivery areas in its latest capacity auction for the 2021/2022 period.  Posted in May, the Reliability Pricing Model (RPM) Base Residual Auction (BRA) prices spiked due to record low energy prices, higher cost of new entry, and a decrease in cleared capacity including 7.4GW less cleared nuclear, among other factors.  So what does this mean in terms of the overall supply $/kWh you pay in PJM? (hint: ↑↑↑) Read on for more.

  • What is PJM RPM?
  • What were the clearing prices?
  • How does this translate to the $/kWh I pay for electricity supply?

What is PJM RPM?

“PJM’s capacity market, called the Reliability Pricing Model, ensures long-term grid reliability by procuring the appropriate amount of power supply resources needed to meet predicted energy demand three years in the future. Under the “pay-for-performance” model, resources must deliver on demand during system emergencies or owe a significant payment for non-performance. Think of this like an insurance policy – for a small additional cost (payment to resources which perform well), consumers will have greater protection from power interruptions and price spikes during weather extremes. By matching power supply with future demand, PJM’s capacity market creates long-term price signals to attract needed investments to ensure adequate power supplies.” (PJM, 2018)

PJM RPM capacity auction

Image Source: https://www.pjm.com/-/media/training/nerc-certifications/markets-exam-materials/rpm/rpm-101-overview-of-reliability-pricing-model.ashx?la=en

After the initial Base Residual Auction, there are 3 Incremental Auctions to allow for replacement resource procurement, increases (procurement) and decreases (selling excess) in resource commitments due to reliability requirement adjustments, and deferred short-term resource procurement. (PJM, 2016)

There are 27 sub-regions that are potential Locational Delivery Areas (LDAs) where there may be locational capacity pricing due to locational constraints.  PJM is split into 5 main regions…

  • Western PJM (ComEd, AEP, Dayton, DLCO, APS, ATSI, Duke)
  • Mid-Atlantic Area Council (MAAC) Region
  • Eastern MAAC (PSE&G, JCP&L, PECO, AE, DPL & RECO)
  • Southwestern MAAC (PEPCO & BGE)
  • Western MAAC (Penelec, MetEd, PPL)

…with separate zones defined by the 19 utilities in PJM territory, with 3 additional sub-zones within the PSEG, DPL, and ATSI zones.

PJM territory

Image Source: http://www.pjm.com/library/~/media/about-pjm/pjm-zones.ashx

In the latest auction, there were 7 LDA price breakouts (as opposed to 11 in 2020/2021), indicating a need for locational capacity pricing in the following zones: EMAAC, PSEG, PSEG North, ATSI, ComEd, BGE, and the catch-all for all other utilities not included in these LDAS, the RTO zone.

What were the clearing prices and why were they mostly higher?

The RTO zone is typically discussed as it represents the majority of PJM’s footprint, and year-over-year this zone’s capacity price increased from $76.53/MW-day to $140/MW-day.  While there was 7.6GW less nuclear generation that cleared, demand response, energy efficiency, solar and wind all increased year-over-year, representing an increasingly diverse set of resources.

PJM capacity prices

Image Source: http://insidelines.pjm.com/capacity-auction-attracts-diverse-competitive-resources/

Prices were higher than the 2020/2021 auction for several reasons:

  • Continuing low energy prices, which causes generators to seek revenues in the capacity market through higher offers.
  • An increase in the reference cost for new generators due to reduced energy revenues and an inflationary adjustment. (PJM, 2016)
  • A decrease in total cleared capacity, including a reduction in offers from new resources.
  • Those factors driving higher prices were partially offset by a lower reliability requirement because of lower forecasts of future electricity demand. (PJM, 2018)

How does this translate to the $/kWh I pay for electricity supply?

The PJM RPM Capacity Auction prices are expressed as a $/MW-day, applicable from June 1 to May 30 of the following year.  Your account’s capacity obligation, the Peak Load Contribution (PLC), coincides with this June 1 to May 30 period and determines the volume of capacity you need to purchase each billing period.  Your PLC tag is determined by your account’s average contribution to PJM’s 5 highest coincident peak hours.  So while you can’t control the $/MW-day that you pay, you can manage your account’s demand during these peak hours, thus lowering the total amount of capacity you need to purchase.  Your PLC is a kW obligation, so to determine your daily capacity cost, simply multiple the PLC tag by the capacity $/MW-day divided by 1,000 (to get to a $/kW-day).  Then multiply this daily number by the number of days in the billing period to determine the billing period capacity cost (or 365 to determine your annual capacity cost).  Here’s an example for an account in the RTO zone:

2020/2021 2021/2022
a) Annual Consumption (kWh) 5,000,000 5,000,000
b) PLC (kW) 1,142 1,142
c) Load Factor (a / (b*8760 hours)) 50% 50%
d) Capacity $/MW-Day (RTO zone) $76.53 $140.00
e) Annual Capacity $ (d*b) $31,888 $58,333
f) Capacity $/kWh (e / a) $0.00638 $0.01167
Y-o-Y Increase $0.00529

The actual $/kWh increase will be determined by your annual consumption, PLC tag, and location within PJM.

To learn more about PJM capacity prices, download the Electricity Markets Explained report.

In order to manage your peak load contribution effectively, you must be informed on what the utilities will not tell you – when peak load hours are actually going to occur.  watchwire will send you day-ahead email alerts when peak load hours are going to take place so you are aware of when to manage your account’s demand.  Learn more about how watchwire gives you the knowledge you need to analyze your energy data in a cloud-based, centralized platform.

 

References:

PJM. (2016, October 10). RPM Incremental Auction FAQs. Retrieved from http://www.pjm.com/-/media/markets-ops/rpm/rpm-auction-info/rpm-incremental-auction-faqs.ashx?la=en
PJM. (2018, June 11). Capacity auction attracts diverse, competitive resources. Retrieved from PJM Inside Lines: http://insidelines.pjm.com/capacity-auction-attracts-diverse-competitive-resources/
PJM. (2018, June 11). Capacity Market (RPM). Retrieved from PJM Learning Center: http://learn.pjm.com/three-priorities/buying-and-selling-energy/capacity-markets.aspx