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Morgan Stanley analysts expect lower clearing prices in PJM auction

Analystsfrom Morgan Stanley are projecting lower prices across most zones in the upcomingPJM Interconnection LLC2019/2020 Base Residual Auction, or BRA. Results of the auction will be releasedat the close of business May 24.

Thisyear's BRA will procure capacity three years out for the delivery period June 1,2019, to May 31, 2020.

Led byStephen Byrd, analysts with Morgan Stanley said in a May 2 note that they are callingfor a lower RTO/MAAC clearing price of about $120/MW-day to $140/MW-day in thisyear's auction. This would compare to the RTO clearing price of $164.77/MW-day inlast year's BRA for deliveryyear 2018/2019.

The annualauctions, which are conducted three years in advance of the commitment period, areusually held in mid-May but the last BRA in August 2015 was delayed to accommodatethe controversial capacity performance, or CP, product.

The MorganStanley analysts also pointed to the possibility of a few regions separating fromRTO to clear at higher prices, earmarking ComEd, EMAAC/PS and ATSI as potentialbreak-outs.

"Basedon our analysis of available resources in constrained zones, we see ComEd as themost likely break-out zone, followed by EMAAC/PS. While ATSI has the potential toprice separate, this will be driven by how FirstEnergy offers units subject to itsproposed PPAs, in our view. We see new build economics and incumbent bidding strategyas key drivers for prices, and forecast $120-140/MW-day for RTO/MAAC, $160-190/MW-dayfor EMAAC/PS, and $170-200/MW-day for ComEd," Morgan Stanley Research wrotein a May 2 note

Meanwhile,analysts with Tudor Pickering Holt recently suggested a clearing price of $120/MW-dayfor the upcoming PJM BRA auction.

The annualBRA is a key component to PJM's forward capacity market, known as the ReliabilityPricing Model, or RPM. As a result of the poor power plant performances during thepolar vortex cold snap in 2014, the controversial capacity performance product,or CP product, was designed to reward top-performing generating units and punishunderperforming resources.

Capacityperformance requires generation, demand response and energy efficiency to performwhen called upon regardless of weather conditions or extreme system conditions.Committed capacity performance resources that do not perform when called upon facesignificant non-performance charges.

The analystswith Morgan Stanley indicated in the report that new build activity will be thebiggest variable in the upcoming PJM auction. The analysts noted that several newgas plants, representing an estimated 4 GW to 6 GW of new build, closed financingover the last six months in preparation for the auction.

"Theyear-over-year changes to the PJM capacity auction drivers are largely negative.From a supply-demand standpoint, the key concern is a decline in peak demand (resultingin lower procurement targets). From a bidding strategy standpoint, we see new buildas the biggest risk for auction prices. PJM has granted 12 GW of minimum offer pricerule (MOPR) exemptions for the upcoming auction, similar to previous years, andwe see several 'high likelihood' projects in this group. However, we note that powerprices have declined modestly since the last auction, driving the capacity priceneeded to 'breakeven' higher for many older baseload coal and nuclear plants inPJM. Netting the positive against the negative, we expect new build and incumbentbidding strategy to be the two largest drivers in the upcoming auction," accordingto the Morgan Stanley research report.

For more detailed capacity marketdata, visit SNLEnergy's Capacity Market Pages.