On June 21, 2022, PJM Interconnection announced the successful procurement of resources in its annual capacity auction–the Base Residual Auction (BRA)–to meet electricity needs and ensure reliable service for the 2023/2024 Delivery Year.
In a press release summarizing the BRA, PJM explains that the latest auction results reflect “a reliable and lower-carbon resource mix that consumers achieve at a low cost.”
Capacity prices for the 2023/2024 Delivery Year were lower than in the previous auction for the 2022/2023 Delivery Year.
As a result, sufficient resources plus robust reserve levels were procured at the cost of $2.2 billion, compared with approximately $4 billion for the current 2022/2023 Delivery Year.
Why are capacity prices low in PJM?
The first thing to understand when examining the cause of low prices in the BRA is the fact that PJM’s current load forecasts are low. The load forecast is the main driver in the direction of capacity prices.
The grid operator is basing its forecasts on two driving factors: 1) recent overall demand reduction and 2) load serving entities (LSEs) removing their load from PJM’s RPM and instead electing to seek procurement themselves via Fixed Resource Requirement (FRR).
When load forecasts are low, as they are in PJM, the highest-priced capacity resources offered into the Base Residual Auction often fail to clear, resulting in overall prices dropping.
Other factors in PJM have also contributed to already low capacity prices being pushed even lower:
- The Market Seller Offer Cap (MSOC) ruling prevented high-priced sell offers.
- The adjusted Minimum Offer Price Rule (MOPR) allowed a greater amount of resources to offer into the BRA at or near the price of zero.
- Several coal plants retired, taking with them a high-priced resource that was replaced with cheaper nuclear and natural gas resources.
- Cheap energy efficiency resources–i.e. permanently reduced demand–cleared the auction, more so than in previous auctions.
To put it simply, PJM has covered its load forecast with cheap resources, which is a win for both PJM and the organizations in the region.
The grid operator has procured the necessary capacity resources to ensure reliability and it’s done so at low capacity prices
When capacity prices are lower, organizations will see lower capacity charges on their electric bills.
How do low capacity prices affect participants in PJM’s Capacity Performance demand response (DR) program?
While low capacity prices mean lower DR earnings per kW of curtailed load, they also mean more reliability for PJM since the grid operator has the required capacity to meet projected demand.
This, in turn, means the likelihood of a large-scale demand response event is greatly reduced. Organizations participating in PJM’s Capacity Performance (CP) will still be paid for the successful completion of a yearly test, albeit at the established price at which their DR commitment cleared in the corresponding BRA.
Though lower capacity prices may impact Emergency Capacity revenue, it provides opportunities in the following areas:
- Higher Synch Reserve Pricing trend
- Higher Economic Pricing Trend
- Lower incentive to peak shave/lower demand charge create opportunity to not peak shave and increase Emergency Capacity revenues with less operational
It’s worth noting that smaller, localized transmission issues can still cause DR events but large-scale reliability issues do not appear to be in the forecast.
To take advantage of these new opportunities, click HERE to contact CPower for additional review of these options, or a reference to our EnerWise platform.