Renewables surge, rapid fossil retirements challenge reliability in PJM

As the PJM Interconnection LLC works to unclog its jammed interconnection queue, the nation's largest grid operator is warning about the need to ensure the lights stay on as new resources vie to fill the gap left by the retirement of fossil-fueled energy sources.

PJM, in a report released earlier this year, warned that increasing electricity demand coupled with the potential for thermal generation retirements running ahead of new resource additions could create "increasing reliability risks" through the end of this decade.

PJM said in its analysis, titled "Energy Transition in PJM: Resource Retirements, Replacements & Risks," that 40 GW of existing generation is at risk of retirement by 2030 while its interconnection queue of new projects is now "composed primarily of intermittent and limited-duration resources."

These intermittent resources, largely solar capacity, have a historical rate of completion of about 5%, according to PJM, and there are projects that have made it all the way through the interconnection queue but are still not under construction.

PJM officials also warned that the grid operator's current reserve margin of about 22% could fall below 14% without an acceleration in the addition of new power generation resources. The reserve margin is a measure of the capacity needed to ensure reliability of the grid.

Meanwhile, the grid operator expects demand growth of 1.4% annually over the next decade, with certain load zones experiencing demand growth as high as 7% per year.

PJM pointed out in its analysis that it has "no authority to order plants to continue operating." The grid operator, however, said it can formally request a power plant to continue operating to maintain reliability while transmission upgrades are completed.

Adequate reserves?

James Wilson, an economist with Wilson Energy Economics, released a white paper in May critiquing PJM's analysis, what he calls the "R4 Report." The critique, "Maintaining the PJM Region's Robust Reserve Margins," was prepared for the Sierra Club and Natural Resources Defense Council.

Wilson, in an interview, said he found PJM's analysis surprising and "kind of disappointing."

"They did this simple balance sheet calculation of just taking a pessimistic retirement scenario, a pessimistic entry scenario and a speculative load forecast scenario. When you put those three next to each other, you get a lower reserve margin," Wilson told S&P Global Commodity Insights.

Wilson, an independent consultant, also pointed out that PJM has tools to address its resource and reliability concerns. One of them is the grid operator's capacity market, called the Reliability Pricing Model, or RPM, which is used to ensure long-term grid reliability by procuring adequate resources to meet future energy demand.

"So, as soon as reserve margins start declining from the current extremely high levels ... as soon as they decline, capacity markets will rise," Wilson said. "That is how their RPM capacity market construct works. It uses a slope demand curve. And for reserve margins to decline, capacity prices have to rise a lot."

PJM said it does not disagree with Wilson's assessment of the function of the capacity market.

"However, the report's intent was to point out the reliability risk due to the confluence of policy and economic factors driving a rapid transition," PJM spokesperson Jeffrey Shields said in an emailed response to questions about the analysis. "The capacity market is expected to respond; however, the question is, will investors be able to maintain existing resources in service given regulatory requirements? And will replacement resources, with the needed reliability attributes, be in place in time to match resource retirements?"

Todd Snitchler, president and CEO of the Electric Power Supply Association, which represents competitive power suppliers, said the group shares a lot of the concerns PJM raised in its analysis.

Snitchler said the analysis "makes some pretty conservative assumptions," but there have been retirements of large coal-fired power plants, such as the 1,915-MW Homer City plant in western Pennsylvania, announced since its release. "And so, those are additional stresses that are put on the system," Snitchler said in an interview.

The North American Reliability Corp. also is "raising the alarm" about resource adequacy, Snitchler said.

PJM's analysis, therefore, raises a "serious question" about its reserve margin, he added.

"Some would say that, well, of course, you want to have a higher reserve margin, you're a generator and that means more money in your pockets," Snitchler said. "But these are independent voices that are making those same assertions and I trust the grid operator to be able to determine what is the concern that they think is important."

A 'fatal flaw'

Wilson also noted that prices in PJM's last three capacity auctions have been "extremely low" or "less than 20% of the net CONE value that is supposed to be needed to attract new entry into the system."

The cost of new entry (CONE) is a capacity pricing tool meant to approximate the revenue that a newly built power plant would need to recoup its costs. The net CONE value subtracts the energy and ancillary services revenues that the plant would be expected to earn in PJM's wholesale markets.

For the third consecutive year, the clearing price for the majority of PJM's footprint fell, settling at $28.92/MW-day for the 2024/2025 delivery year.

"So, the fatal flaw in PJM's balance sheet calculations, it totally ignores RPM, [because] as soon as reserve margins decline ... capacity prices will rise. And historically, when capacity prices rise, the market responds," Wilson said. "Retirements are delayed, new entry comes in and it brings reserve margins back to the ample levels."

Wilson said he calculated the capacity prices that would need to occur to realize PJM's balance sheet scenarios, "and they're astronomical."

"We've never seen anything like those capacity prices. And if we were to get anywhere near them, the market would, of course, respond," Wilson said.

In addition, Wilson said PJM's analysis creates "a false alarm on resource adequacy."

Out of PJM's projected 40 GW of anticipated retirements between 2022 and 2030, coal-fired capacity represents 60% of the total, with natural gas at 30% and other resources making up the remainder.

"I mean, there is the possibility that a very, very rapid retirement scenario could occur, but that would only occur in a context of low capacity prices that encourage those retirements," Wilson said. "Low capacity prices only happen when you have ample reserve margins. And that would happen if you had slow load growth and lots of new entry."

Casey Roberts, a senior attorney with the Sierra Club, contends PJM "painted a very unrealistic picture" of what impact federal environmental policies will have on retirements by not accounting for units that can afford to retrofit to meet compliance obligations.

"They will retrofit to reduce those emissions and then stay in operation," Roberts said.

Of the 40 GW of projected retirements, PJM said 25 GW are driven by policy.

The Electric Power Supply Association, meanwhile, is advocating for a balanced approach to what it calls the energy expansion.

"I think one of the things that we bump into and we try to be very mindful of is that it's not a one-for-one replacement," Snitchler said. "By that, I mean, if you retire 1,000 MW of dispatchable generation ... and you replace it with renewables or battery storage, it is not a 1 MW for 1 MW replacement. ... And so, we have to think more holistically about how we're addressing ensuring system reliability going forward."

The solutions

While the analysis raises concerns about a logjam of renewable projects seeking to interconnect to the regional grid, PJM on July 10 officially launched its transition to a "first-ready, first-served" clustered cycle approach to processing requests from developers.

Through this new process, PJM expects to clear more than 260,000 MW in proposed generating capacity by the end of 2026 — about 62,000 MW in 2024, another 100,000 MW in 2025, and an additional 100,000 MW in 2026. More than 95% of those projects represent renewable energy, battery storage or a hybrid of both.

PJM has the second-largest interconnection queue in the US, behind the California ISO's nearly 540 GW of capacity undergoing impact studies, according to a new S&P Global Commodity Insights report. "PJM dominates in absolute stand-alone solar capacity, however, with a proposed 170 GW — 34.1% of the tracked stand-alone solar total," Commodity Insights senior research analysts Adam Wilson and Tony Lenoir wrote in the report.

PJM's queue reform proposal, approved by the Federal Energy Regulatory Commission in late November 2022, included a transition process with a special "fast lane" for projects that are found to have "only a minimal network impact or only have minimal cost responsibility for network upgrades."

"Our transition plan should process enough interconnection requests to make up for retiring thermal generators — now, we just have to work together to make sure these new projects come online," PJM Vice President of Planning Ken Seiler said in a July 6 news release ahead of the official launch.

Snitchler called PJM's move to a "first-ready, first-served" process from a "first-come, first-served" approach for interconnection requests a "very good first step."

"I think the issue also is a little more complicated, unfortunately," Snitchler said. "If you look at the track record of resources that are in the proposed queue for development, the success rate or the completion rate is shockingly small."

Snitchler believes PJM's new approach "will help focus the queue process [and] result in projects that are actually viable to be able to be developed going forward."

Capacity market reforms

PJM also is seeking capacity market reforms to address system reliability during the region's energy transition.

"We believe our markets are structurally sound but the landscape [is] changing and, in some cases, policy is chilling investment," PJM President and CEO Manu Asthana said during a June 15 capacity market forum in Washington, DC. "The mix of generation resources coming in is intermittent, so we need multiple megawatts to replace those retiring."

At the forum, PJM said it is updating its capacity accreditation approach, used to compensate resources for their reliability attributes, and has proposed a seasonal capacity market design that would be split between summer and winter.

"The accreditation reform, along with seasonal capacity prices, is going to be a very effective mechanism for steering the resource mix as it changes over the coming years," Wilson said.

Snitchler, however, pointed out that the grid operator and its stakeholders also need to take into account how to "compensate resources that may not be collecting subsidies but are needed in order to ensure system reliability."

"I think these market reforms have to account for and contemplate how those resources will be fairly compensated in order to ensure that they remain viable and around to deliver that reliability," Snitchler said.

In addition, newly proposed emissions restrictions by the US Environmental Protection Agency also could have "profound effects" on dispatchable generation, especially coal-fired power plants, "and I think those have to be thought through very carefully or we could stumble our way into a reliability crisis that is readily avoidable," Snitchler said.

PJM, however, is still concerned about resource adequacy and reliability risks, even as it works on "maintaining existing resources," Shields said.

"PJM and its stakeholders are indeed addressing the issues that we can impact — through reforming our capacity and reserve markets and embarking on the landmark capacity reform process that started this month," Shields said. "But whether the resources that will replace the retiring generators will actually be built remains a significant unknown. We have over 44,000 MW of generation projects that have successfully cleared the new services queue but have not moved to construction, whether due to supply chain, siting, or financing challenges."

"[A]t the end of the day, the new generation must get built."

Regulatory Research Associates is a group within S&P Global Commodity Insights.

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