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Future PJM capacity auctions could be impacted by potential policy changes

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Future PJM capacity auctions could be impacted by potential policy changes

The next few years could prove to be interesting for the PJM Interconnection's Base Residual Auction, or BRA, with several policy decisions currently under review having the potential to impact future auction results, analysts from UBS Securities said in a May 31 research note.

For example, a recent proposal to implement a two-stage auction could impact the outcome of next year's BRA, the analysts said. PJM Interconnection issued a proposal May 2 to modify its capacity auction process in response to state policy initiatives designed to keep ailing nuclear generators operating.

In its 2016 State of the Market report, PJM's market monitor, Monitoring Analytics, said that nuclear subsidies undermine the efficacy of the grid operator's capacity market and recommended that the regional transmission organization adopt rules expanding offer floors for existing units.

Under the proposal, PJM would hold a two-stage auction that would provide appropriate price signals and commit "only the quantity of capacity necessary in a given delivery year." Resources would submit a single set of offers as per the current process, but PJM would determine the amount of cleared capacity and clearing prices in separate stages.

The UBS analysts expect decisions on external capacity and the Quadrennial Review could have on capacity auctions beyond next year's. During the Quadrennial Review, officials look at the shape of the demand curve and the Cost of New Entry, or CONE, used to draw the demand curve itself. The review is underway and will consist of an independent third-party report and stakeholder input.

"We note that results of the Quadrennial Review will likely not affect the upcoming [2021/22] auction, but possibly that of the following year. Among the clearest structural issues to be decided here is the prospect of changing the reference technology to set the demand curve to a [combined-cycle gas turbine] from a [combustion turbine] unit, potentially putting downward pressure on the overall y-axis of the demand curve," UBS said in the report.

The annual PJM auctions are conducted three years in advance of the commitment period. This latest auction covered the delivery period of June 1, 2020, to May 31, 2021.

At $76.53/MW-day, the 2020/2021 delivery year clearing price for capacity performance resources, including generation, demand response and energy efficiency, was down 24% from a price of $100/MW-day last year in all of PJM except for several constrained regions.

Ongoing transmission limits and retiring generators worked to support a breakout in prices in four zones: $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, or DEOK. In May 2016, the 2019/2020 delivery year price for capacity performance resources cleared at $119.77/MW-day in EMMAC and $202.77/MW-day in ComEd.

According to the UBS analysts, anticipated retirements and deactivations in MAAC, EMAAC and DEOK, as well as grid congestion in ComEd, helped clearing prices in these regions breakout higher in the latest auction.

"We note that transmission improvements in ComEd could well increase in the [Local Deliverability Areas' Capacity Emergency Transfer Limit] moving forward and possibly lead to future auction price declines, all else left equal modestly, but expect nuclear plants to continue to 'set' price (if not Quad Cities, Byron, or otherwise)," the UBS note said.

This PJM BRA was the first under the 100% Capacity Performance requirement and was the first time PJM required projects to bid in either annually or through the seasonal aggregation facilitated by PJM. Most of the capacity cleared on annual bids, with about 400 MW clearing through seasonal aggregation.

According to the UBS analysts, the 100% Capacity Performance requirement had a marginal impact on conventional generation, but significantly impacted renewables, demand response and energy efficiency, which all saw declines in terms of total cleared capacity.

"The 100% Capacity Performance requirement also had the rather unexpected result of propelling price-responsive demand, a little used existing measure working on the demand and not supply side. Overall, 558 MWs of price-responsive demand cleared the auction, primarily in the Baltimore and Pepco LDA," the note said.

The annual BRA is a key component to PJM's forward capacity market, known as the Reliability Pricing Model, or RPM. As a result of the poor power plant performances during the polar vortex cold snap in 2014, the Capacity Performance product was designed to reward top-performing generating units and punish 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.