By Matthew Rose, Enerdynamics Instructor
Each year, the PJM Interconnection administers the Reliability Pricing Model (RPM) auction to ensure forecast electricity requirements for the PJM system three years in the future with prices established through competitive bidding. The auction reflects pricing from a range of available conventional supply sources: fossil fuel and nuclear plants competing with renewable energy, demand response (DR), and energy efficiency. The forward basis for the auction ensures long lead times for builders to complete asset construction or upgrades. This year’s auction concluded in May. Following is a look at results and how they caught many by surprise.
2017-2018 auction results
The just-completed auction procured 167,004 megawatts (MW), which includes a 19.7% reserve margin for the PJM RTO. The capacity clearing price for all resources throughout the entire RTO was $120 per megawatt-day. The exception is PSE&G‘s service area where prices came in at $215 per megawatt-day. The PSE&G location appears to be the only capacity-constrained area in the auction. This reflects a notable price increase over the prior year’s auction result and came as a surprise to many who had predicted lower prices.
The results also depict changes in the types of resources clearing the auction. As shown in Table 1, the auction includes a significant share of demand response resources as part of the cleared resource pool. A total of 10,975 MW of demand response was procured — a decrease of about 1,433 MW from last year’s auction.
However, there was a significant shift to the types of demand resources that have more flexibility and a greater contribution to reliability. There was an increase in PJM “annual” and “extended summer” demand resources clearing in this auction. This shift gives system operators more year-round flexibility when needed. PJM experienced the need for flexible demand response during recent extreme weather, both in September 2013 and January 2014.
The shift to increased amounts of new natural gas-fired generation continues with roughly 4,800 MW of new combined-cycle generation clearing for the first time in this auction. Almost all of this cleared new capacity is located downstream of west-to-east transmission constraints or in areas with capacity needs.
Energy efficiency continues its growth trend in PJM’s capacity auctions. This year, a record 1,339 MW of energy efficiency was procured in the auction, an increase of 222 MW from last year’s auction.
The RTO estimate of $120 per megawatt-day continues the trend of widely divergent capacity prices over the past five years. As shown in the graph below, the cleared capacity price for 2017-2018 auction is dramatically higher than last year’s auction when it cleared at less than $60 per megawatt-day.
According to various financial forecasts and industry watchers there was a predisposed view that prices would remain depressed as a result of low natural gas prices and a slow economy with limited demand. The fact that the RTO price cleared $120 caught many by surprise.
We will have to wait until next year to see whether higher capacity prices are a trend or an anomaly.
- Bloomberg News, Electricity prices will rise to ensure U.S. power grid can meet long term demand, May 27, 2014PJM Press Release, PJM Capacity Market Secures New And Diverse Resources To Meet Future Electricity Demand, May 23, 2014
- RTO Insider Capacity Prices Jump Following Rule Change, May 27, 2014
- John Funk. PJM auction shows surge in gas-fired power plants on the way. Cleveland Plain Dealer, May 25, 2014
- Julien-Dumoulin Smith, RPM Results The Power Trade Is Back. UBS Research Report, May 23, 2014
- UBS Electric Utilities Global Research. Monitoring PJM’s Markets: A Discussion With the Market Monitor, June 2, 2014
- UBS Electric Utilities Global Research. Lessons Learned From the Capacity Auction in PJM, June 2, 2014
- PJM Interconnect. 2017/2018 RPM Base Residual Auction Results, May 23, 2014