Outcome Highlights Need for Market Revisions to Ensure Capacity Market Properly Values Reliability Resources
PJM Interconnection has announced the results of its annual capacity auction, or base residual auction (“BRA”), for the 2023/2024 Delivery Year (“DY”). It is important to note that this long-delayed auction is for the upcoming delivery year, not the typical three year-ahead auction schedule.
PJM cleared 144,870.6 MW of capacity, with a significantly lower price of $34.13/MW-day for most of PJM’s region (the “RTO price”) compared to $50.00/MW-day for the 2022/2023 auction a year ago. The BRA procured 3,329.7 MW of capacity from new generation and 404.8 MW from uprates to existing or planned generation. On the other side of the ledger, more than 11,000 MW of generation did not offer into this BRA compared to the prior auction. This trend is an important one to watch as it reflects a shrinking volume of resources on which to rely to procure adequate supplies of power.
This is the second BRA in a row with significantly reduced prices, and the third-lowest RTO price in the capacity auction’s history. While EPSA is pleased that PJM was able to secure sufficient resources to ensure adequate power for the 2023/2024 DY in this auction – and the low capacity clearing price represents a savings for customers in the short term – these results highlight real concerns over adequate compensation for resources needed to support reliability in all conditions and for longer duration, underscoring the need to establish a clear and useful price signal for capacity resources.
In addressing potential factors contributing to the clearing price results, PJM pointed to a number of possibilities, including, among other things, the first application of the less restrictive minimum offer price rule (or “Focused MOPR”), which was applied to only seven resources representing 76 MW; a revised, lower unit specific Market Seller Offer Cap (“MSOC”); and, a one-year lead time to the delivery year rather than the standard three-year forward period. Notably, the auction delay and compressed auction timeframe were the result of FERC actions in several proceedings.
EPSA has previously raised vigorous concerns about the likely impacts of these flawed market design elements, now reflected in the BRA results, and is currently in litigation to address these issues. Specifically, EPSA is actively seeking reversal of the Focused MOPR and revisions to the Market Seller Offer Cap due to their negative impacts on generators that provide reliable, dispatchable power.
EPSA has consistently advocated for the need to ensure these critical market mechanisms appropriately reflect the costs and risks of accepting a capacity obligation to be available to operate to facilitate reliability, as well as to address the price suppressive effects of subsidized resources clearing the system.
Further, this year’s Summer Reliability Assessment from NERC has warned that expected extreme weather poses elevated or high levels of reliability risk and power outages for several areas of the country. While PJM was not identified as a high-risk region, there have been suggestions that reliability can be managed through inter-regional transfers or wheeling power, including from PJM into these other at-risk regions. To the extent that the trend of retirements and lower additions of new resources continues in PJM, however, this may pose challenges sooner than expected and to surrounding regions as well as PJM itself.
The BRA results are a clear reminder of the cumulative impact of FERC decisions on market design affecting supply and retirements. Simply abandoning capacity markets, or critical market design elements, is not the answer to ensure future reliability of the system. EPSA urges policymakers and regulators to focus on market-based reforms that properly value reliability resources at a competitive price. EPSA reiterates its desire to work closely with PJM and other stakeholders to help achieve that goal.
While PJM may have abundant supply today, it is critical that PJM retains the most efficient supply to provide the services necessary for reliability tomorrow – keeping the lights on, which is job number one.