The Cost of Reliable Power

The cost of keeping the lights on just got a little more expensive according to the recent “do over” capacity auctions held by PJM. Before I jump into the details let me start from the beginning. PJM is the regional transmission organization in Ohio that is responsible for the reliability of the bulk electric power system and the operation of competitive wholesale power markets. (See my past blog PJM: The Oz Behind the Curtain for more detailed information.) PJM incentivizes power plant owners to provide electricity to the grid during critical times through an annual “capacity” payment. The value of the annual payment is set by an auction process held three years in advance of the delivery year. High capacity rates would indicate areas where more generation is needed (either in the form of a new power plant or a new transmission line). Every customer receiving power is paying for this capacity payment through the rate provided by their generation supplier.

Sounds like a perfect system. So why the increase in capacity costs? Well it all goes back to the infamous “Polar Vortex. During the winter of 2014, temperatures achieved extreme lows causing energy demand to soar by 25%. At the same time demand was increasing, power plants were dropping out of service due to mechanical problems and inability to obtain natural gas for fuel. The generation forced outage rate ended up 3 times the normal outage rates at a whopping 22%. PJM was able to maintain reliability during this period but not without some serious concern and the market delivering extreme short term price spikes.

In response to the lessons learned from the Polar Vortex, PJM created new standards to improve generator reliability and performance during extreme conditions on the grid. The standards come with a stick and a carrot approach. It will penalize generators receiving capacity payments if they do not provide power when the grid needs it the most and it rewards those that over perform during such critical conditions.

Since the capacity requirements are different so too must be the payments from consumers. As stated earlier, the auctions are held three years in advance. In order to implement these standards immediately, PJM is in the process of holding “do over” auctions. These new auction rates will be blended with the original auction prices over the next few years. As of now, two new performance auctions have occurred each resulting in higher prices.

How will this impact you? First, you will not see any impact until June 2016, so there is time to adjust your budget. If you are currently in a supply contract that included capacity as part of your fixed rate for the next few years you could see a pass through amount of around $0.003 to $0.005 per kWh. This pass through amount will likely be lower starting June 2017 but we will not know this amount until the last auction is posted later this month. For any new contracts, these higher capacity costs will be included in the offers from suppliers. Expect to see new offers increase by around 5% due to the improved reliability.