Searching For Meaning in the PJM Capacity Auction

Last week, the regional organization that operates the electricity grid for a large part of the country from Chicago to New Jersey and Northern Virginia held an auction to procure electric generating capacity to meet power needs in the 2015-2016 timeframe.  After a lot of speculation that capacity prices could increase dramatically, folks in this part of the region are now discussing the implications of what actually occurred.  For our part of the region, the capacity price went from $125/MW-day in 2014-15 to $136/MW-day in 2015-16, an increase of only about 7.5% compared to last year’s auction.  The Northern Ohio region did see a much larger increase due primarily to poor-long-term planning by FirstEnergy.

1.   What does this mean for Illinois electricity customers?    It means that a small portion of the bill that pays for capacity will go up by a small amount during the 2015-16 timeframe.  Capacity costs are 10-15% of the total bill and if that portion goes up by 7.5%, that means a bill increase of about 1%, all else being equal.  However, all else is not equal.  One reason capacity prices are going up is because natural gas prices are going down.  Lower natural gas prices means that fewer coal plants will continue operating, which creates a little more scarcity in the capacity markets until new generation and energy efficiency are integrated into the system.  Since energy prices make a bigger impact on our bills, our total bills may well go down even with a slight increase in the capacity portion.  Why does did the Chicago Tribune report that we are facing a large price spike?  The reporter was looking back several years to a much earlier auction that procured the capacity we rely on today.

2.  What does this mean for companies that operate plants in Illinois, like Exelon, Midwest Generation, Ameren or Dynegy?  Low natural gas prices and low demand for power reduces the selling price that these companies get for their energy.  Therefore the capacity market can be another important source of revenues.  The small increase in the capacity price seen in last week’s auction was probably a disappointment to them.  Today there is additional speculation (based on unnamed “analysts” cited in a Crain’s story), that the lower than expected capacity price could result in Midwest Generation to close additional plants and file for bankruptcy.

3.  What does it mean for Tenaska?  Tenaska was hoping for a much bigger price spike to justify its rhetoric that building the Taylorville power plant would help offset higher capacity prices.  In any event, the notion that a 600 MW plant in Illinois could measurably impact the PJM market prices has been dispelled repeatedly including by the Illinois Commerce Commission in its study of the costs and benefits of the proposed Taylorville facility.  The auction also showed us that the market is finding new resources to ensure reliability, including natural gas, demand response, wind and solar capacity, without relying upon enormous subsidies like the one that Tenaska seeks from Illinois electricity customers.  Bottom line, capacity prices never were and certainly are not now a good reason to give that costly facility the green light.

4.  What else did we learn from the auction resultsDemand response and energy efficiency continue to play an increasingly important role in providing peak capacity resources.  The market procured 14,833 MW of demand response, 5% more than last year’s auction, which was 50% more than the previous year.  This is more than all of the coal capacity that is expected to retire in the PJM region.    This is great for consumers because demand response is less expensive than building power plants, and makes the system both leaner and cleaner by reducing peak demand.  With better rule for the auction, even more energy efficiency resources can play a role in the future. 

Wind and solar power increased significantly as well.  Solar will provide 56 MW and wind will provide 796 MW of the capacity procured this year, respectively.  Natural gas accounts for the bulk of the new resources that were among the winning bidders in the auction.