The PJM Capacity Auction Results Are In!

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The most recent PJM capacity base residual auction for the capacity year of June 1 2020 – May 31 2021 has concluded, and the results have been posted.  For electricity consumers, this does not have any immediate impact on current bills or contracts that they are on.  Impacts from this auction will not be felt by customers on index products until they are billed in June of 2020 and beyond.  However, and more importantly, customers who plan to lock into contracts of partially or fully fixed products that stretch past May 2020 will feel the effects in each new price quote that they receive.  Before looking at the different Patriot Energy strategies of how electricity consumers can best manage the implications and costs of this auction, a background on capacity is needed.

A capacity charge is just one of the several components that go into an electric consumer’s bill, which also include energy, renewable, and ancillary charges.  Following energy, the capacity charge is the next biggest portion of a consumer bill.  The reason for a capacity charge is so that each time a consumer flicks a switch, pushes a button, or plugs into an outlet, there is always electricity flowing to power their lights, devices, and machines.  At the most basic level, a capacity charge is electricity insurance.  It is a guarantee that there will always be more power supply on the PJM grid than the demand created by consumers.  This is especially crucial for times that consumer demand is extremely high.  Just as charges for car insurance are customer unique and required to drive, capacity is an unavoidable charge that is determined on a per customer account basis.  Now that a basic explanation of the charge is known, it is time to look at where capacity comes from and how the charges for it are calculated.

Formally known as the Reliability Pricing Model (RPM), PJM uses a futures market auction to obtain capacity.  Auctions are held 3 years in advance of a capacity year to get a solid plan for electricity supply insurance in place.  Generation resources both internal and external to the PJM grid as well as demand resources bid into these auctions.  After a PJM predetermined volume of megawatts is obtained starting from the lowest bids until the volume requirement is satisfied the auction will conclude.  Then the amount the auction bidders will be paid is determined by an established complex sloped supply demand curve.   Actual capacity that is obtained in these auctions are the physical abilities for PJM to turn on generation which increases supply, and the ability to shutdown resources which decreases demand.  Essentially PJM is renting either part of or whole generation units that they can turn on anytime to make sure there is enough supply.  The same goes for the demand resources they rent which they can turn down or off to decrease demand on the grid.  Like how renting housing is usually on an annual basis and costs differently depending on the neighborhood, capacity for the same year can cost different amounts due to the physical location.

The two main reasons that capacity values vary in different locations are that generation and demand reduction resources exist in different physical locations, and the fact that electricity must flow over power lines to reach the consumer.  Areas that have a lot of resources and plenty of power lines to flow electricity will have lower prices, while in turn those areas that are short resources and have few power lines so that their electric flow limits are maxed out will have higher prices.  Investors are attracted to build new resources in the areas with the higher capacity values because they will receive greater compensation.  At the top of this article is a map showing the results of the recent capacity auction split by Locational Deliverability Areas (LDAS).  Below is a table showing the results of capacity clearing prices over the upcoming years, and a graph highlighting the RTO, which represents most of PJM, and the two problem areas:

 

A comparison of the prices on the table and graph above show that ComEd and EMAAC are the areas that most require new investment to build generation, demand resources, and transmission power lines.  These results also show that the PJM capacity program is working effectively to reduce the price of electricity insurance for most of the grid, while identifying problem areas with high prices so that investment is attracted leading to reduced costs in following years.  A consumer can see whether their LDA is higher or lower than others, but how does this translate into the charges and contract rates they receive.  This is where Patriot Energy can use market expertise to evaluate different strategies for consumers depending on their personal preference for electric supply type and term that best align with their company goals.

Electric supply contract term length, product type, and then finally a consumer’s personal capacity tag will determine the capacity rate that they will be charged.  A capacity tag is an individual consumer’s percentage allocation of the costs for the capacity program for the entire PJM grid.   These consumer capacity tags are calculated annually based on their percentage of grid usage during the highest 5 hours of PJM demand on different days from June 1 to Sept 30.  This means a consumer’s capacity tag and resulting charges can go up or down each year, but many consumers are not taking advantage of the ability to manage this.  Patriot Energy has several products and strategies that give consumers an opportunity to lower their capacity tags, which would lead to drastic reductions in capacity charges they pay all year.

Strategies that Patriot Energy offer include hybrid products, capacity pass thru, electricity usage curtailment programs, energy efficiency, on-site generation, solar, installing an interval meter, and utilizing price response programs.  These are just some of the ways that Patriot Energy will be able to optimize your electric consumption.  These solutions can be best tailored to your needs with a deeper understanding of your business and goals.  Please contact your energy supply consultant to find out the solutions that would work best for you.

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