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PJM’s Capacity Auction Paints Bleak Picture for Power Generators

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Jun. 21 2016, Updated 8:07 a.m. ET

PJM Interconnection’s capacity auction

Grid operator PJM Interconnection’s recent capacity auction for June 2019–May 2020 reflects poor sector fundamentals driven by supply and demand issues. Last month’s auction cleared 167,306 megawatts of capacity, which came in at more competitive prices than last year. These prices fell due to energy efficiency programs and a drop in natural gas prices.

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Factors contributing to the fall in power prices

Wholesale power prices have remained low and are likely to worsen the problems facing independent power producers. A lower load forecast and a large amount of new gas-fired combined cycle generation have pulled power prices lower. Nearly 5,000 megawatts of new natural gas–fired generation were on offer in these auctions. The $100 per megawatt-day prices were far below analysts’ expectations. UBS analysts estimated $125 per megawatt-day, while Tudor, Pickering, Holt, & Company estimated $150 per megawatt-day.

In the Eastern MAAC delivery area, the capacity performance price in the auctions was $119.77 per megawatt-day, while in the Baltimore Gas & Electric delivery area, it was $100.30 per megawatt-day. In Commonwealth Edison’s territory, the price was $202.77 per megawatt-day. All regions reported a significant fall compared to prices in previous auctions.

According to PJM Interconnection, the auction will cost-load a total of $6.9 billion in 2019–2020, compared with $11 billion in last year’s auction for 2018–2019.

PJM Interconnection’s capacity market ascertains long-term grid reliability by obtaining power supply required three years from now, plus the expected rise in demand or reserves. Power generators get “pay-for-performance” by delivering power reliably, particularly during emergencies.

Impact on merchant generators

Exelon (EXC), the largest nuclear generator, was the biggest loser in this year’s PJM Interconnection capacity auctions. As a result, it won’t get any capacity revenues in 2019–2020, which could have a negative impact on its earnings. The shares of hybrid utility FirstEnergy (FE) and merchant generators Dynegy (DYN) and NRG Energy (NRG) skidded after these auctions.

In the next article in this series, we’ll discuss institutional investors’ holdings in power generators.

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