Capacity Auction Results for 2018-19 in Line with Expectations

Executive column: Stu Bresler, senior vice president – Market Operations

The recently completed Base Residual Auction has made Capacity Performance a reality in the capacity market structure. The Capacity Performance model directly links capacity payments with more stringent requirements for generator accountability and performance to ensure reliable power supplies for consumers.

The success of the auction for the 2018/2019 delivery year bodes well for the future of the capacity market and reliability. While capacity prices were higher, the results were in line with expectations and reflect the costs of securing dependable capacity.

That the Capacity Performance clearing price was well below the offer cap speaks to the integrity of the market results, healthy competition and the lack of market power issues.

The RPM capacity market supports investments that ensure reliability – investments in both new resources and maintaining existing resources.

PJM’s paramount responsibility is ensuring adequate, reliable power supplies at all times. The Capacity Performance standard ensures that resources will be available when most needed to serve customers, during extreme weather and other system emergencies.

At least 80 percent of the cleared capacity for 2018-2019 was required to meet Capacity Performance requirements: being capable of sustained, predictable operation and  providing energy and reserves when needed throughout the delivery year.

While the new generation total (2,919 megawatts  of new generation and 588 MW of uprates) was somewhat lower than in recent years, the continued response reflects well on the capacity market’s ability to attract investment in new resources. Over the past four auctions, more than 18,000 MW of new generation has cleared.

The auction also showed something of resurgence for legacy coal and nuclear assets, with units clearing in this auction that had not cleared last year.

Overall, the results of the first Capacity Performance auction demonstrated a positive response to the new standards.

While the costs of Capacity Performance are higher, the requirements are an insurance policy for grid reliability.

For a small additional cost, consumers will receive greater protection from interruptions during extreme weather — summer or winter. It is also protection from highly volatile prices due to unexpected supply shortages, as occurred during the Polar Vortex, when wholesale prices exceeded $1,800/megawatt-hour and out-of-market costs for January 2014 totaled nearly $600 million.

The maturing of the PJM capacity market, as reflected in the success of this auction, shows that we have a healthy, sustainable competitive market that can support investment in both new resources and legacy assets. The goal will continue to be capacity prices that are predictable and sustainable year after year in support of reliability.