Analyst predicts higher prices for PJM capacity auction

Bernstein Research said in a Feb. 3 analysis that most signs point to higher prices during the PJM Interconnection capacity auction that occurs this May for delivery year 2018/2019.

On Jan. 30, PJM Interconnection issued the planning period parameters for its 2018-2019 capacity auction (base residual auction or BRA auction) set for May. PJM wants market participants that plan to offer a generation resource to file their “intent to offer” by March 1.

The auction opens May 11, according to PJM.

In an assessment led by Bernstein Research Senior Analyst Hugh Wynne concludes that capacity prices should rise in the upcoming auction, probably by at least $50. Bernstein Research is affiliated with Sanford C. Bernstein Co.

PJM has said that “a Capacity Performance Resource must be capable of sustained, predictable operation that allows the resource to be available to provide energy and reserves whenever PJM determines an emergency condition exists.”

PJM and other regional transmission organizations (RTOs) have been working to shore up their system reliability since the much-dissected “polar vortex” of January 2014.

On Jan. 6, 2014, record wintertime peak demand (142 GW), combined with generation outages totaling 22% of PJM generation capacity, which left the PJM Interconnection with only 500 MW of synchronized reserves, Bernstein said.

Further generation failures or a modest increase in load would have triggered emergency measures to maintain electricity supplies at a time when temperatures were below10 degrees Fahrenheit across much of PJM. In response to this event, PJM has proposed radical changes to its capacity market, Bernstein noted.

Bernstein said: “We expect PJM’s proposed reform of its capacity market rules to contribute to higher prices for capacity in three ways:”

** By increasing the demand for capacity in the auction while reducing its supply;

** By increasing the cost of supplying capacity, by imposing far more stringent reliability requirements on capacity performance resources;

** By increasing the risk of participating in the capacity auction and by creating a mechanism to charge for this increased risk, specifically by introducing draconian penalties for non-performance, Bernstein said.

A link to the PJM auction parameters can be found at

http://www.pjm.com/~/media/markets-ops/rpm/rpm-auction-info/2018-2019-planning-period-parameters-current-oatt-provisions.ashx.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.