Lower PJM Prices Show the Promise of Capacity Market Reform

Consumers across the Mid-Atlantic and Midwest will pay less next year after PJM’s latest capacity auction showed that markets can ensure reliable power at reasonable prices. The challenge now is to ensure PJM—the nation’s largest grid operator—doesn’t backslide to the days of inflated electricity prices that prop up old fossil fuel plants and spur bad investments in unnecessary new ones.

To ensure there’s enough electricity to meet high demand on the hottest days of summer and the coldest days of winter, PJM holds annual auctions for capacity—either power plants that commit to being available, or customers who commit to conserving energy in emergencies. The cost for next year’s capacity fell to the lowest in a decade. Consumers will collectively pay $2.2 billion to guarantee enough power next year compared with about $4 billion this year, and as much as $11 billion in the not-too-distant past.

Some of this savings is a bit of luck: PJM typically holds these auctions three years in advance. In part because of this long lead time, PJM has consistently overestimated the amount of power it needs. But, because of some legal issues a few years ago (the infamous minimum offer price rule, or MOPR, which we happily no longer need to discuss) auctions have been delayed, and this one was only held a year in advance. A shorter lead time led to a more accurate forecast of power needs. This lets PJM avoid buying expensive unneeded capacity. Consumers emerged as the big winner.

But why were prices even lower than last year? Most notably, more than five gigawatts of Illinois nuclear power cleared for the first time in recent years. The exact reason why is unclear, but the plants’ owner says they were losing money and were saved by Illinois’ recent clean energy law.

Environmental groups have long claimed that PJM’s excess capacity was keeping surplus coal plants running, and this auction bears them out: PJM bought nearly 5,800 megawatts less capacity from coal this year. This demonstrates that old, dirty fossil plants can retire without endangering grid reliability.

For renewables, the auction was more of a wash: an increase in solar was more than offset by a decrease in wind, but renewables still only make up about 2% of PJM’s capacity supply. This tells a cautionary tale for the future of the clean energy transition in PJM. Thousands of solar and wind projects remain in limbo as the process for connecting renewables to the grid, called interconnection, remains slow. Even allowing for the usual rate of proposed projects not getting built, there’s enough wind and solar waiting for approval to meet over 20% of PJM’s capacity needs. The savings from getting this power online would be enormous.

This latest capacity auction demonstrates a few core truths about where we are – and where we need to go in PJM:

• The last few years have proven that forecast error is costing billions of dollars and emitting excess megatons of carbon dioxide.  As the auctions get back to a regular schedule, PJM needs to make sure these errors don’t creep back in;
• Transmission planning, especially around connecting renewables to the grid, has become a major bottleneck to clean power;
• Owners of gas plants and old coal plants want PJM to buy massive amounts of extra capacity--they even put out a press release complaining about accurate forecasts and market power mitigation. If done right, capacity markets can ensure reliability at reasonable cost and without subsidizing unneeded resources. But, capacity markets are complex in design, and suppliers will never stop trying to capture them to limit competition and raise prices.
• Capacity market rules need to evolve to recognize the ways a balanced mix of solar, wind, storage and demand response can deliver a low-carbon, reliable grid.

PJM is reviewing its capacity market framework, and has proposed reforms that would limit excess procurement while still making sure reliability standards are met. More reforms will be needed to better avoid and manage forecast error. We’re hopeful that PJM leaders will continue to improve their market rules, keeping prices low for consumers while guaranteeing the reliability of the grid as we transition away from fossil fuels.