The Capacity Noose

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The noose keeps tightening around the neck of high priced power plants. PJM, the transmission grid operator for Ohio, held its annual capacity auction for the period of June 1, 2019 through May 31, 2020 with surprising results. The auction prices for all of Ohio came in 40% lower than the prior year. This was especially shocking as PJM recently modified the capacity rules to increase reliability and, in turn, to provide more compensation for power plant owners. Not only did the auction prices come in low but the reserve margin, increased by nearly 6% to a whopping 22.4% (I’ll explain that in a minute). Knowing that generators have been retiring a significant amount of coal generation how did the auction come in so low?

The resources that make up the supply of capacity to the auction include existing generation, new generation, a limited amount of imported generation, demand response and energy efficiency. The goal of the auction is to satisfy the load forecast plus a targeted capacity reserve using the least cost resources. Each resource provides its capacity offer. If a resource clears in the auction then it receive a capacity payment from PJM. If the resource does not clear then it generally gets no payment for capacity.

This most recent auction had the largest amount of capacity eligible ever at 194,243 MW, which is an increase of 2.5% over last year. While there were generation units that did retire, the amount of new generation overcame retirements. The new generation segment increased by 45% over the average amount of new generation supplied in the past three auctions. The amount of resources that cleared in the auction to satisfy the demand was 167,305 MW, nearly flat compared to the last auction. In an over-simplified explanation,  supply increased while demand was flat causing the supply curve to shift down to lower prices.

This auction is significant for two major reasons: 1) the continued litigation among the Ohio utilities and the PUCO regarding their above-market power plants; and 2) the impact to your supply prices. Certainly the lower capacity rates continue the pressure on AEP Ohio and FirstEnergy to find a solution to their high cost units. The lower rate may impact the value of such plants in an acquisition play and may force the closure of not only units here in Ohio but elsewhere in the PJM footprint. The low rate also illustrates that there is plenty of generation to satisfy the current demand plus a hearty reserve margin. Although very difficult for the owners of these resources, it is good news for the consumer. A typical manufacturer can expect a $0.004 per kWh decrease in generation rates during this period compared to the previous year.