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Understanding the Recent PJM Capacity Auction

May 26, 2017

On Tuesday, May 3, the PJM Interconnection – the world’s largest single competitive energy market – released the results of its annual capacity auction. Capacity auctions ensure that there is sufficient generating capacity to serve the entire Northeast region even on the coldest and hottest days of the year when the electricity demand, or “load”, is highest.  The auction does this by relying on competitive offers by coal, natural gas, and nuclear generating resources as well as customer-oriented controllable demand products such as demand response (where customers agree to curtail their power use in times of high demand) to meet PJM’s forecasted load. 

In PJM, the main auctions are always for a three-year ahead delivery period, so this week’s auction established load commitments for the June 1, 2020 to May 31, 2021 delivery year. Auction participants use these market outcomes to make decisions about investing in existing generating facilities as well as building new plants. PJM is part of a larger grid in the US, and serves in all or part of 13 states and the District of Columbia.   

There are several “capacity zones” in PJM, and the prices set in each zone can vary on account of many factors including energy supply, forecast demand, energy efficiency improvements, new generating facilities being built that would be online during that delivery year, and the limitations of the grid to import or export power. In this week’s auction, PJM procured 165,109 megawatts (MW) for the 2020-2021 delivery year, including a “reserve margin” of 23% of capacity beyond PJM’s estimation of what its highest load is likely to be.

Capacity prices contribute to the total charge paid by an electricity customer, in addition to cost of actual electricity consumed by each residence or business. Typically, though, the largest part of any customer’s bill is what are called T&D charges, transmission and distribution, which are paid to your local utility to actually get the electricity to your home or business.

This year, the prices across the several PJM Zones ranged from $76.53/MW-day for a large area referred to as RTO, and the highest price was for the ComEd Zone, which refers to the local utility that serves a large area in and around Chicago, at $188.12/MW-day. Prices fell from the level of last year’s auction, mainly because of supply and demand changes, according to PJM.

Load can vary widely, too. In addition to summer peaks when air conditioners are whirring, one of the highest load times of the year is the Friday and weekend after Thanksgiving, when many families and businesses string up and plug in billions of colored lights for the holiday season!  Super Bowl Sunday is another day of unusually high demand, as hundreds of millions of TV sets go on at the same time and stay on for several hours. PJM’s capacity market helps ensure customers have access to electricity resources to meet these demands.

Although there is some controversy about capacity charges and capacity markets among industry-watchers, most agree that capacity markets are a good and necessary way to ensure that there is enough generating capacity to support customer load throughout the year.

David Gaier

Spokesman, media contact, and communications counselor for NRG's East Region and the NRG Energy Centers. The East region, which extends from Illinois to Massachusetts to Maryland, can produce almost 2...

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