On Wednesday, PJM announced the results of its long-awaited 2022-23 capacity auction, including prices dramatically lower than the 2021-22 auction. The auction occurred more than 2 years behind schedule due primarily to wrangling at FERC over the design of a Minimum Offer Price Rule applied to policy-supported resources. The (typically) annual Base Residual Auction (BRA) was the first held in three years.
The RTO Region price – applying to most of the footprint – cleared at $50/MW-day, a 64% drop from the prior auction’s price of $140/MW-day. Constrained areas also cleared at prices 30% to 70% lower. While there was a general expectation that this auction may see lower prices, the magnitude of the fall took many observers by surprise.
Daymark follows PJM’s capacity market closely on behalf of several clients and to hone our market modeling and forecasting capabilities. CapMarker RPM is Daymark’s proprietary model that simulates the supply and demand clearing function of this market. We plan to review data as it becomes available to better understand what happened in this long-anticipated yet still surprising event. Here are some of our initial thoughts on potential causes for the low pricing based on the data immediately released by PJM:
- Lower reliability requirement and lower Net CONE value. Both of these differences impact the Variable Resource Requirement (i.e., demand) curve, reducing the price at which supply clears.
- Lots of new generation. Just over 6 GW of new unforced capacity (almost 9 GW installed capacity) cleared from new units or uprates to existing units, the most in 15 years of auctions. The delay in the capacity auctions has seemingly done little or nothing to slow down PJM’s development pipeline, with 5.6 GW of new combined cycles, 1.4 GW of new solar, and 0.3 GW (ICAP) of new wind resources leading the charge. Given the timing of this auction (just one year prior to delivery period), most investment decisions for these projects have already been made, so the resources may have been incented to bid as low as possible to ensure they cleared.
- Nuclear jumps back in the game. According to PJM’s press release on the auction results, an additional 4,460 MW of nuclear capacity cleared in this auction compared to the last auction, when many nuclear generators (particularly in the greater Chicago area ComEd zone) sat out or failed to clear. We will be looking closely at the nuclear bidding behavior as more information becomes available. Some nuclear owners may be hoping for state subsidies such as the proposals currently being debated in the Illinois General Assembly. The PJM Market Monitoring Unit has issued numerous warnings of excessive market power in PJM’s capacity market tied in part to concentrated ownership of nuclear units.
- Dominion exits the market. Dominion took its roughly 17 GW peak load obligation and exited the market through election of the Fixed Resource Requirement (FRR) option. Dominion’s exit more than doubled the obligation of FRR entities and significantly reduced the footprint remaining in the BRA. The impact of such changes can be hard to predict, but given the nested structure of the market, can lead to surprising outcomes and big changes in prices.
It is early days yet in understanding what occurred in this momentous auction. The importance of understanding these dynamics is magnified by the accelerated schedule of the next few auctions as PJM gradually catches up on its 3-year forward market design. The 2023-24 auction will take place in December of this year and the 2024-25 auction will follow in June 2022.
We are looking forward to continuing the conversation,