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PJM pending auction results clouded by state nuclear subsidy debate

State-approved subsidies for nuclear plants and the planned retirement of three such facilities could bear heavily on the results of PJM Interconnection's most recent annual auction for future generating resources.

PJM is expected to release the result of its 2018 annual capacity auction May 23. Since the 2017 auction was held, states such as Illinois and New Jersey have worked to pass legislation to support nuclear plants selling into PJM, which could change how or whether owners bid those units into the auction. The results to be released are for the auction that locks in supply for the 2021/2022 delivery year, which runs from June 1, 2021, to May 31, 2022.

Nuclear legislation has moved furthest along in certain key PJM transmission zones that saw some of the the highest clearing prices in prior auctions. For example, Northern Illinois, which falls in Commonwealth Edison Co.'s service territory, cleared at $188.12/MW-day in the 2017 auction, compared to an average clearing price of $76.53/MW-day for the entire "rest-of-RTO" region.

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Though experts from PA Consulting and S&P Global Platts forecast capacity prices in ComEd to clear above the rest-of-RTO price for the 2018 auction, they expect them to fall from last year's levels in part because PJM raised the limit on how much power ComEd can import from 4,064 MW to 5,574 MW.

A large amount of supply in ComEd may not be economic to clear and could add to constraints in that area. An S&P Global Market Intelligence analysis estimated about 11,883 MW in ComEd is at risk of not clearing based on power price forecasts as of May 17.

A new energy law implemented in Illinois on June 1, 2017, also could change which units clear in ComEd. The 1,819-MW Quad Cities nuke, co-owned by Exelon Corp. and MidAmerican Energy Co., did not clear in the 2017 auction but could be better positioned now that the new law, called the Future Energy Jobs Act, offers the plant subsidies. That law allows Quad Cities — as well as the Clinton plant, which sells into the central power grid Midcontinent ISO — to sign 10-year contracts for subsidies in the form of zero emission credits.

In the rest-of-RTO region, experts anticipate seeing some rise in clearing prices due to potential nuclear plant retirements. In March, FirstEnergy Corp. announced plans to close three nuclear plants, with a total capacity of 4,048 MW, in the rest-of-RTO region by 2021. Two of those plants, Davis-Besse and Perry, are located in northern Ohio in the American Transmission Systems Inc. service territory. The third plant, Beaver Valley, sells into southwestern Pennsylvania. FirstEnergy's wholesale subsidiary FirstEnergy Solutions Corp. petitioned the U.S. Department of Energy in March to issue an emergency order to keep its three plants operating.

Despite the uncertainty around federal or regional support for nuclear plants, Manan Ahuja, S&P Global Platt's senior director of North America Electric Power Analytics, said in a May 2 interview that he assumes FirstEnergy's three nukes retire in his forecast. That assumption raised his forecast clearing prices by $5/MW-day to between $85/MW-day and $95/MW-day in the rest-of-RTO region. The adjustment came after PJM in late April confirmed it did not need the units for reliability.

Clearing prices in the Eastern Mid-Atlantic Area Council region, which covers New Jersey as well as Delaware and eastern Maryland, could add to the debate on whether nuclear plants in the Garden State need additional subsidies. In the 2017 auction, Public Service Enterprise Group Inc. cleared about 7,800 MW at a weighted average price of $174/MW-day. Since then, Public Service Enterprise Group Chairman, President and CEO Ralph Izzo has lobbied for state subsidies for its 1,172-MW Hope Creek nuclear plant and the 2,328-MW Salem plant it co-owns with Exelon. In mid-April, the New Jersey Legislature passed a bill to make nuclear plants eligible for zero emission credits, but that bill awaits action from Gov. Phil Murphy.

Last year, the Eastern Mid-Atlantic Area Council region cleared $187.87/MW-day.

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The overall fundamentals suggest downward pressure on prices from reduced demand and thus lower supply needs. The 2017 auction cleared a total of 165,109 MW of capacity. That amount was 6.7% above PJM's target reserve margin of 16.6%, which reflects the extra supply the grid operator needs to meet demand and reliability standards. In the 2018 auction, PJM lowered its forecast demand by 1% to 152,647 MW. Its reserve margin requirement also fell to 15.8% from 16.6% from the 2017 auction, according to PJM's auction parameters as of May 3.

The oversupply was compounded by about 2,823 MW of new supply that cleared the 2017 auction. The question now is how much new supply was offered into the 2018 auction, given assumptions around whether existing nuclear plants retire or receive enough support to stick around.

Like S&P Global Market Intelligence, S&P Global Platts is a division of S&P Global.