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Analyst outlooks run mixed for upcoming PJM capacity auction

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Analyst outlooks run mixed for upcoming PJM capacity auction

Following the release of planning parameters in early February, analysts' estimates for clearing prices in the PJM Interconnection 2021-2022 Base Residual Auction, or BRA, this May are largely mixed.

Bidding behavior will have the largest impact on the upcoming PJM auction clearing price. According to analysts with Macquarie, difficulty predicting the behavior of companies such as Exelon Corp. in ComEd and Public Service Enterprise Group Inc. in Eastern MAAC makes price separation in these regions more likely.

In May 2017, the 2020-2021 delivery year clearing price for capacity performance resources cleared at $76.53/MW-day for all of PJM except four regions. Ongoing transmission limits and retiring generation led to a breakout in prices: $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.

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Planning parameters issued Feb. 1 outline PJM RTO load at 152.67 GW for the 2021-2022 BRA, down about 1.25 GW, or 0.8%, from the forecast peak of 153.92 GW for the 2020-2021 BRA.

Despite the decline in the peak load forecast, an increase in the net cost of new entry could be supportive for prices in many regions in the May auction. The net cost of new entry is used to set price points on the demand curve and often directs the tone for auction clearing prices.

PIRA Energy Group, an analytics and forecasting unit of S&P Global Platts, said it expects the forthcoming auction to clear higher year on year in a range of $80/MW-day to $90/MW-day for the RTO region.

"As expected, another round of downward peak load revisions put downward pressure on the demand curve. However, counterbalancing [the] impact of [the] upward revision to the Net Cost of New Entry (Net CONE) and potential Energy Efficiency (EE) add backs put our estimates of demand curve higher" year on year, said PIRA's senior director of North America Electric Power, Manan Ahuja.

"The estimated supply curve still remains quite flat and relatively unchanged with tempered enthusiasm for new entry at these price levels," he added. PIRA expects that Eastern MAAC and ComEd prices will be lower year on year, "though they are still likely to be higher than their parent [Locational Deliverability Areas]," Ahuja said, noting that the Duke Energy's Ohio and Kentucky region could again breakout higher and is likely to price higher year on year.

Analysts also indicated that changes to the Capacity Emergency Transfer Limit, or CETL, values should impact auction prices. The CETL is the ability of the transmission system to deliver energy into a given area experiencing a localized capacity emergency.

"We see similar capacity zones breaking out in the upcoming auction as the 2020/21 auction, with flat year-on-year pricing in MAAC and RTO. In EMAAC and ComEd we see downward pressure on pricing (in the $140-175/MW-day range), due mainly to higher CETL values. However, in an interesting twist, we think PSEG may separate from EMAAC in the $200/MW-day range, due to lower CETL values (which should have been used in the 2020/21 auction, but weren't, due to an error made by PJM)," Trevor McManamon, analyst at PA Consulting's Global Energy & Utilities group, said in an email.

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Additionally, after ongoing legal maneuvering, the minimum offer price rule will remain in effect during the May auction, which is also seen as supportive for BRA clearing prices. The minimum offer price rule 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.

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 of the auction will be posted May 23.

The 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 in 2014, the capacity performance product was designed to reward top-performing generating units and penalize 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.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.