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PJM capacity market auction could be delayed another year, uncertainty persists

As PJM Interconnection market participants unpack the Federal Energy Regulatory Commission's long-awaited order revising the grid operator's capacity market rules, the work needed to implement that order will most likely mean the region's next base capacity auction will have to be delayed for another year.

Stakeholders and PJM indicated Jan. 8 that they would seek clarification on several aspects of the order and at least one market participant advocates seeking a compliance filing deadline extension. "There are likely scenarios and business decisions out there that we don't know exist," Adam Keech, PJM's vice president of market operations, said during a PJM Market Implementation Committee meeting.

Keech said the purpose of the meeting was to gather feedback from stakeholders that would help PJM craft its compliance filing in response to FERC's December 2019 order aimed at addressing the price-suppressive impacts of subsidized resource participation in the market. Keech cited the considerable changes between what the grid operator proposed and FERC's final order, including a broadened definition of a state subsidy and a narrower set of exemptions from the minimum offer price rule, or MOPR, that sets a default floor price for certain generation resources to clear capacity market auctions.

Keech said some of the many legitimate stakeholder questions may need to be handled with requests for clarification or rehearing filed to FERC. Rehearing requests are due Jan. 21, and PJM's compliance filing is due March 18.

Keech added that PJM would be filing for rehearing as well, but he declined to expand upon which issues the grid operator planned to ask FERC to reconsider. With no statutory obligations on when FERC must act on rehearing requests, some stakeholders expressed concern regarding what protracted regulatory proceedings would mean for scheduling the next capacity auction. PJM did not hold a base capacity auction in 2019 for delivery years 2022/23 because FERC directed it to wait for the capacity market order.

Paul Scheidecker, PJM's senior lead engineer for capacity market operations, said running a base residual auction in late 2020 may be technically feasible, but he and Keech agreed that plenty of questions need to be resolved before any auctions can be scheduled.

One stakeholder said during the committee meeting that, given the complexity of the order's potential market impacts, PJM should request a compliance filing deadline extension of at least 120 days.

Market impacts

A stakeholder with fossil fuel generation and a variety of other assets in PJM expressed concern that market participants who want to delay capacity auctions further, namely renewable generators, are less concerned about forward price signals because they are getting revenue from outside the market.

One renewable energy generator agreed that renewables are less reliant on capacity market revenue, but argued the expanded MOPR will have other negative power pricing impacts.

While wind and solar resources do earn less of their revenue from the capacity market, with a typical wind project receiving 13% of its nameplate value from capacity auctions and solar securing about 38%, project developers and investors have relied on the ability "to pass the benefit of capacity revenues on to customers in the form of lower [power purchase agreement] prices," Eamon Perrel, senior vice president of business development at renewable energy developer Apex Clean Energy Inc., said Jan. 8 during a webinar hosted by trade group Advanced Energy Economy.

"A typical wind project might need to increase a 12-to-15-year PPA price by about $3-$7/MWh, and a solar project ... would need to increase PPAs by about $5-$9/MWh to fully offset the impact of lost capacity revenues," Perrel said. That represents "a significant 10-20% increase on PPA rates for wind and maybe 15-25% for solar."

Perrel added that the exemption for existing renewable projects from the MOPR is likely to apply to about 8,700 MW of wind and solar generation interconnection requests currently in PJM's queue. That leaves about 92,000 MW of proposed wind and solar projects that are not grandfathered. He argued that the order would have "a material negative impact" on the buildout of wind and solar generation in PJM, and it was already making PPA negotiations more difficult. "We're working now to figure out the best way to structure transactions to mitigate that impact," he said.

One argument for delaying the next capacity auction is that states will need time to enact legislation and regulatory changes to comply with the order. Stakeholders remain split on this issue, but many are eager to move forward with the auctions.

"The delay in holding PJM's annual capacity auction has already extended well beyond what is tolerable when it comes to ensuring reliability and innovation for customers in the PJM region," Todd Snitchler, president and CEO of competitive generator trade group Electric Power Supply Association, said in an email.

"Waiting another year will only result in more uncertainty and negative outcomes. If competitive power suppliers are to be able to ensure reliability while continuing their progress on building new assets that advance clean energy goals, they need the clear signal provided by the [base residual auction] to make prudent investment decisions regarding their generation fleet," Snitchler said. (FERC docket EL16-49, EL18-178)

Jared Anderson and Jasmin Melvin are reporters for S&P Global Platts. S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.