You may recall the Polar Vortex of 2014 that brought extremely frigid temperatures and a very tight energy supply to our region that winter. Combine that with another colder-than-average winter in 2015 and a major trend from coal to natural gas fired generation, and the folks who are responsible for electric grid reliability started talking about making some pretty big changes to the wholesale electricity markets.
For our region, that reliability-focused organization is PJM Interconnection. PJM has been an independent organization managing electricity generation dispatch and competitive markets since 1997. Headquartered in Valley Forge, PA, PJM’s territory includes all or part of 13 states in along the east coast and mid-Atlantic region, plus the District of Columbia.
To get the lowest cost electricity possible to meet demand and ensure resources are available in the future, PJM basically holds a reverse auction where electricity generators submit their lowest bid to supply electricity in different amounts, locations, and situations. One of the main things PJM proposed to hedge against another close call was by adding a new market offering to the mix called Capacity Performance resources. This option put more requirements on generators designed to guarantee their availability in times of need, but offered a financial premium for them to do do. FERC approved these changes saying that generators were “not being properly incented to make the investments required to perform reliably, including during extreme weather conditions.”
The results of the first Capacity Performance auction held earlier this week are in, with aclearing price of $164.77/megawatt-day for most of the PJM footprint, with around 20% of a “reserve margin” procured (or the buffer to ensure demand doesn’t outstrip supply). The RTO clearing price in last year’s auction was $120/MW-day.
The higher clearing price means more money for traditional generators who can guarantee their ability to standby until needed. But, it does mean that these increased costs will be passed along ultimately to consumers. As Andy Ott, PJM’s Executive Vice President, explains it: “The stronger requirements for Capacity Performance represent an insurance policy for consumers against capacity shortages and dramatic price spikes. The auction prices are in line with the costs of securing this dependable capacity.”
RTO Insider: PJM Capacity Prices Up 37% to $165/MW-day
Energy Manager Today: Prices and Reliability Up, with PJM’s First Capacity Performance Auction