What the Latest Capacity Auction in PJM Means for Reliability and Demand Response

July 20, 2022

On June 20, 2022, PJM Interconnection announced the successful procurement of resources in its annual capacity auction–the Base Residual Auction (BRA)–to meet electricity needs and ensure reliable service for the 2023/2024 Delivery Year. 

In a press release summarizing the BRA, PJM explains that the latest auction results reflect “a reliable and lower-carbon resource mix that consumers achieve at a low cost.” 

The following breakdown is a rough estimate of the generation resources being used in PJM to meet demand:

Gas:  43%
Nuclear:  30%
Coal: 19%
Wind:  4%
Solar: 2%
Other: 2%

Capacity prices for the 2023/2024 Delivery Year were lower than in the previous auction for the 2022/2023 Delivery Year. 

As a result, sufficient resources plus robust reserve levels were procured at the cost of $2.2 billion, compared with approximately $4 billion for the current 2022/2023 Delivery Year. 

Why are capacity prices low in PJM?

The first thing to understand when examining the cause of low prices in the BRA is the fact that PJM’s current load forecasts are low. 

The grid operator is basing its forecasts on two driving factors: 1) recent overall demand reduction and 2) the rise and strong performance of fast response resources (FRR) such as demand response and ancillary services. 

When load forecasts are low, as they are in PJM, the highest-priced capacity resources offered into the Base Residual Auction often fail to clear, resulting in overall prices dropping.  

Other factors in PJM have also contributed to already low capacity prices being pushed even lower:

  • The Market Seller Offer Cap (MSOC) ruling prevented high-priced sell offers. 
  • The adjusted Minimum Offer Price Rule (MOPR) allowed a greater amount of resources to offer into the BRA at or near the price of zero.
  • Several coal plants retired, taking with them a high-priced resource that was replaced with cheaper nuclear and natural gas resources. 
  • Cheap energy efficiency resources–i.e. permanently reduced demand–cleared the auction, more so than in previous auctions.

To put it simply, PJM has covered its load forecast with cheap resources, which is a win for both PJM and the organizations in the region. 

The grid operator has procured the necessary capacity resources to ensure reliability and it’s done so at low capacity prices

When capacity prices are lower, organizations will see lower capacity charges on their electric bills. 

How do low capacity prices affect participants in PJM’s Capacity Performance demand response (DR) program?

While low capacity prices mean lower DR earnings per kW of curtailed load, they also mean more reliability for PJM since the grid operator has the required capacity to meet projected demand. 

This, in turn, means the likelihood of a large-scale demand response event is greatly reduced. Organizations participating in PJM’s Capacity Performance (CP) will still be paid for the successful completion of a yearly test, albeit at the established price at which their DR commitment cleared in the corresponding BRA. 

It’s worth noting that smaller, localized transmission issues can still cause DR events but large-scale reliability issues do not appear to be in the forecast. 


Related: PJM’s Grid of the Future Includes Renewables and Lucrative Ancillary Services

 

Published by

Dann Price

Mr. Price has specialized in PJM Demand Response for more than 10 years. As CPower’s Executive Director of Market Development for the PJM market, he is responsible for keeping hundreds of customers with thousands of sites up-to-speed on market conditions, energy prices, program particulars, and regulatory issues in the ever-changing PJM demand response market.

Dann Price

Mr. Price has specialized in PJM Demand Response for more than 10 years. As CPower’s Executive Director of Market Development for the PJM market, he is responsible for keeping hundreds of customers with thousands of sites up-to-speed on market conditions, energy prices, program particulars, and regulatory issues in the ever-changing PJM demand response market.