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PJM's planning parameters for May auction meet expectations; weak prices eyed

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PJM's planning parameters for May auction meet expectations; weak prices eyed

This article is part one of a series of stories previewing expectations for PJM Interconnection's forward capacity auction in May. The other articles in the series can be found here: Part 2, Part 3 and Part 4.

PJM Interconnection's newly issued planning parameters for its 2020/2021 Base Residual Auction, or BRA, include a mix of positive and negative data points, and while in line with many analyst projections, could equate to overall weak prices across nearly all zones in the May auction.

The most notable change in PJM's planning parameters, issued Feb. 1, is that the peak load forecast was cut by approximately 3.3 GW from 157.2 GW used in the prior auction to an estimate of 153.9 GW in the 2020-2021 auction. The latest forecast is about 231 MW higher than what was released in PJM's official load forecast report in late December 2016.

"The parameters include a mix of positive and negative data points relative to last auction, with the key negative being a lower load forecast. However, the negative changes were well telegraphed to the market, and are already reflected in our expectations for only modest price upside year-over-year driven by the phase in of the Capacity Performance product," analysts with Morgan Stanley said in a Feb. 2 note.

The annual PJM BRA auctions, which are conducted three years in advance of the commitment period, are held in mid-May. The upcoming auction will cover the delivery period of June 1, 2020, to May 31, 2021. The auction window opens May 10 and closes May 16, with results to be posted on May 23.

In May 2016, the 2019-2020 delivery year clearing price for capacity performance resources, which included generation, demand response and energy efficiency, cleared at $100/MW-day for all of PJM except for the EMAAC, ComEd and BGE regions, which cleared at higher points. ComEd cleared at $202.77/MW-day while EMAAC cleared at $119.77/MW-day.

Most analysts are now calling for an RTO clearing price in the forthcoming May auction between $100/MW-day and $120/MW-day, with modest zonal breakouts likely.

Morgan Stanley analysts are projecting an RTO clearing price in the range of $110/MW-day to $130/MW-day and pointed to possible breakouts in the ComEd and EMAAC regions in a range of $150/MW-day to $200/MW-day.

Analysts from Evercore ISI point to a possible clearing price of $95/MW-day for the RTO region, a price of $160/MW-day for EMAAC and a price of $180/MW-day for ComEd.

In his last available estimates from late November 2016, UBS analyst Julien Dumoulin-Smith projected an RTO clearing price of $110/MW-day to $120/MW-day with EMAAC prices possibly clearing at a $20/MW-day premium to RTO.

"One of the key factors we see driving outcomes is the diminished spark spread due to improving natural gas prices ... this assumes the clearing price will be driven by a new gas plant in each of these regions," Evercore ISI said.

In the upcoming May PJM auction, capacity performance, which imposes penalties on poorly performing generators, will increase to cover 100% of the market.

"However, two years of consecutive demand reductions and large amounts of new build have significantly reduced the supply 'shortfall' for the Capacity Performance (CP) product. Furthermore, since no actual penalty events have occurred yet we believe it is possible that some market participants will reduce their pricing of risk associated with participating in the product. As a result, while we do see modest upside in a 100% CP world, we expect the year-over-year improvement to be small for the RTO region. That said, we continue to expect additional retirements of uncleared capacity (predominantly older coal plants)," Morgan Stanley said.

As far as a positive data point in the recently released parameters, PJM is reviewing the possible impacts of the planned retirement of Entergy Corp.'s Indian Point 2 and Indian Point 3 nuclear reactors, as well as the cancellation of the ConEd wheel, which could lead to a possible tighter revision of parameters for several eastern zones.

The ConEd wheel was an agreement under which the New York ISO and PJM jointly fixed certain intermarket transmission flows. The cancellation of the wheel results in a net tightening of the PJM region, the Morgan Stanley analysts noted.

"On the positive side, PJM may still revise eastern zones tighter to reflect the Indian Point nuclear plant retirement in New York and loss of a transmission agreement with ConEd. We believe this could be positive on the margin, but do not expect changes to materially impact the supply-demand outlook for the entire market," the Morgan Stanley analysts said.

The Morgan Stanley analysts also pointed to a flat to lower net cost of new entry, known as net CONE, which is used to set price points on the demand curve and often sets the tone for market clearing prices.

For the upcoming auction net CONE for RTO, the "base" capacity region in PJM decreased by more than $5/MW-day, from about $299/MW-day to near $293/MW-day, while net CONE for ComEd increased slightly, from $328/MW-day to $330/MW-day. Net CONE for PS and PS-North also saw a modest increase, while all other localities were flat to down, Morgan Stanley said.

For more detailed capacity market data, visit our Capacity Market Pages.