PJM Interconnection's planning parameters for the 2021-2022 Base Residual Auction include mixed but ultimately supportive drivers that could result in generally higher clearing prices on the year in May.
In May 2017, the 2020-2021 delivery year clearing price for capacity performance resources cleared 24% lower at $76.53/MW-day for all of PJM except four regions. Ongoing transmission limits and retiring generation led to a breakout in prices at four zones: $86.04/MW-day in MAAC, $187.87/MW-day in Eastern MAAC, $188.12/MW-day in ComEd, and $130/MW-day in Duke Energy's Ohio and Kentucky region.
Although the planning parameters, issued Feb. 1, forecast peak PJM RTO load at 152.67 GW for the 2021-2022 Base Residual Auction, or BRA, down about 1.25 GW, or 0.8%, from the forecast peak of 153.92 GW for the 2020-2021 BRA, other market factors could offset the impact of this decline on prices.
"The cut disproportionately affects Eastern MAAC and [Southwestern] MAAC more than other zones. Still, we had previously estimated that sensitivity to a 1 GW change in capacity in the RTO region is equal to $3/MW-day, suggesting a limited impact. We expect the net effect including net [Cost of New Entry] and increased constraints in [Southwestern] MAAC would still be positive," Bank of America Merrill Lynch analyst Julien Dumoulin-Smith said in a Feb. 5 research note to clients.
Despite the decline in the peak load forecast, an increase in the net cost of new entry, or net CONE, is likely to be supportive for prices in the next auction. The net CONE is used to set price points on the demand curve and often directs the tone for clearing prices.
"We further highlight the large increase in net CONE due to lower ancillary revenue offset [year on year] is driving a material upward shift in the [Variable Resource Requirement] curve, suggest[ing] an improvement in capacity prices. Having said that, while these remain positive data points, we emphasize bidding behaviors and strategies, as opposed to demand, will likely be the main factor in determining the ultimate clearing price," Dumoulin-Smith said.
After ongoing legal wrangling, the minimum offer price rule, or MOPR, will remain in effect during the May auction, which is also seen as supportive for clearing prices. The MOPR was designed to keep buyers from unfairly driving down capacity prices and requires certain generators entering the market with new capacity to bid at or above a default price set by the Federal Energy Regulatory Commission, unless they can prove that their costs are lower than the default price.
"FERC ruled in Dec. 2017 to reject PJM's proposal to alter MOPR after its original decision to accept PJM's reform was remanded by the D.C. Circuit. As a result, MOPR will remain in place until PJM submits a new capacity market reform proposal. MOPR serves as a boost to capacity prices, as we might expect an $80-$120/MW-day floor as a result. However, this also will inject uncertainty into bidding as to whether units would clear the MOPR, making projects more difficult to finance as well," Dumoulin-Smith wrote.
The annual PJM auctions are conducted three years in advance of the commitment period. The May auction will cover the delivery period of June 1, 2021, to May 31, 2022. The auction window opens May 10 and closes May 16. Results will be posted May 23.
The annual BRA is a key component to PJM's forward capacity market, known as the Reliability Pricing Model. As a result of the poor power plant performances during the polar vortex cold snap in 2014, the capacity performance product was designed to reward top-performing generating units and punish underperforming resources.
Capacity performance requires generation, demand response and energy efficiency to perform when called upon regardless of weather conditions or extreme system conditions. Committed capacity performance resources that do not perform when called upon face significant nonperformance charges.
For more detailed capacity market data, visit our Capacity Market Pages.
