Experts have offered various explanations for why they believe prices in PJM Interconnection's recent capacity auction, which secures commitments three years in advance of when the power is needed, cleared about 83% higher in certain transmission zones than in the previous year's auction.
Held earlier in May, the base residual auction for the 2021/2022 delivery year cleared a total of 163,627 MW, only slightly lower than the 165,109 MW that cleared the 2017 auction. Most areas across the PJM region cleared higher in the 2018 auction than in 2017. For example, northern Illinois, which is located in Commonwealth Edison Co.'s service territory, cleared 4% higher at $195.55/MW-day. The Baltimore Gas and Electric Co. area, which covers Baltimore City and all or part of 10 counties in central Maryland, cleared at $200/MW-day compared to $86.04/MW-day in the 2017 auction. The "rest of RTO" region, which excludes certain constrained zones in PJM, was priced 83% higher at $140/MW-day. Only the Eastern Mid-Atlantic Area Council, or EMAAC region, covering New Jersey, Delaware and parts of eastern Pennsylvania and Maryland, cleared lower in 2018, falling 12% from the previous year to $165.73/MW-day.
PJM highlighted several reasons for the hike in prices, such as higher transmission limits that restrict the amount of imports into certain zones and a decrease in the overall cleared capacity. Moreover, generators are raising their offers in the capacity markets to make up for relatively low power prices in PJM's separate short-term energy markets, according to the grid operator's 2020/2021 BRA results report.
Addressing the auction results, Paul Sotkiewicz, president of the Florida-based economic consulting firm E-Cubed Policy Associates, in a May 24 interview noted that relatively little new generation cleared in the 2018 auction. Only one new 893-MW combined-cycle cleared in 2018, while the 2017 auction cleared 2,350-MW of new combined-cycle gas units.
Sotkiewicz, who previously served as an economist at PJM for eight years, said several ideas about what might be behind that trend are being bandied about among industry stakeholders. For instance, onerous processes for requesting an exception to PJM's minimum offer price rule — which aims to prevent buyer-side market manipulation by requiring generators to bid in at a minimum level that represents their costs — might have caused some new unit owners to hold back from offering into the auction. Some also say a number of new units may have offered but been unable to clear, according to Sotkiewicz, who added that he is more skeptical of that possibility because only 2,700 MW of gas did not clear in the 2018 auction.
On the surface, higher clearing prices indicate opportunities for new generation, so Manan Ahuja, senior director for North America Power Analytics at S&P Global Platts, said he was surprised so few megawatts of new capacity cleared in the 2018 auction. In a May 25 interview, Ahuja said that might be due to PJM's "healthy" reserves.
"Investors in new generation might be asking how can we make money in a market that has enough supply," he said.
Ahuja also suggested that generators might be waiting to get a handle on their market risks. For example, he noted that new natural gas pipeline capacity planned for the Appalachian region could impact the fuel cost of new gas generators. Furthermore, he noted that power providers are awaiting the outcome of the Federal Energy Regulatory Commission's general ongoing proceedings on price formation in regional power markets as well as separate efforts to reform PJM's capacity and energy pricing schemes.
Zonal clearing prices
Trends in some zones may be more easily understood. For instance, FirstEnergy Corp. did not clear about 4,080-MW of nuclear capacity across the Ohio and Pennsylvania area, which contributed to higher pricing in the American Transmission Systems Inc. area covering northern Ohio. And two Exelon Corp. nuclear plants that did not clear capacity in the ComEd area.
Ahuja said the Duke Energy Ohio Inc. area, which covers part of southwestern Ohio, and the BGE territory are relatively small demand areas and therefore are "sensitive" to changes in demand, supply and imports from year to year. Out of 163,627 MW that cleared, only 2,733 MW cleared in DEOK and only 1,938 MW cleared in BGE.
In BGE, for example, just 356 MW less capacity cleared in the 2018 auction than in the 2017 auction. That was enough to cause prices to spike in the region, Ahuja indicated.
The BGE territory has a total of 5,400-MW of installed capacity, of which plants at 10-MW or larger make up the majority of the supply, according to data from S&P Global Market Intelligence.

New entry and fuel mix changes
Analysts such as Evercore ISI noted that the rise of renewables, energy efficiency and demand response shows a variety of resources filling in to make up for a decline in overall nuclear capacity clearing the auction. Demand response resources are paid to curb their demand during peak times.
About 500 MW more coal-fired capacity and 1,000 MW more gas-fired capacity cleared in the 2018 auction compared to the 2017 auction. Some of the additional coal capacity reflects efficient coal plants that might have made some environmental upgrades, Stu Bresler, senior vice president of markets and operations at PJM, said on a May 23 press call.
The higher amount of demand response resources that cleared was surprising, Ahuja added. "The [demand response] folks have had some time to figure out how aggregation works," so the 2,040-MW of additional demand response resources that cleared in 2018 shows that more were getting comfortable with how to comply with new performance requirements that PJM phased in after the 2014 polar vortex.

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