At PJM Capacity Auction, Good News for Utilities — for Customers, Not So Much

Power grid operator secures the electricity needed to keep the lights on, but consumers can expect to see higher bills

transmission lines
In a year when many of the nation’s power suppliers faced huge economic challenges, there was a bit of good news this week.

The country’s largest power grid this month secured supplies the region will need in the future, paying much more for the electricity that will keep the lights on than the previous year.

The results announced by PJM Interconnection of an annual auction it conducts drew more scrutiny than usual, in part, because of the woes experienced by many power generators, including coal and nuclear plants that have been retired prematurely.

They also had implications in New Jersey, where Gov. Phil Murphy on Wednesday signed legislation that could direct up to $300 million in annual ratepayer subsidies to nuclear units operated by the Public Service Enterprise Group in South Jersey. Without the subsidies, PSEG had threatened to close the plants.

As it turned out, PSEG bid the units into the auction, and all cleared, meaning they will receive capacity payments in 2021 to provide power to the grid when the market demands it. The price in the auction will be $166.73 per megawatt-day, about a $22 drop from the previous year.

A PSEG spokesman noted the drop and the nuclear units clearing the auction. “An added benefit of our participation and clearing the auction is that the clearing price and capacity costs was in all likelihood lower than it would have been if we had not cleared as many megawatts,’’ said Michael Jennings.

However, PSEG Power, the company’s subsidiary, will receive $204.29/megawatt-day in capacity payments, up from $188.63/megawatt-day the previous year, for most of the other power plants it operates in New Jersey. The higher costs are attributed to transmission constraints, which spike power prices, according to PJM.

The ratepayer point of view

Consumer advocates had a different perspective.

“Obviously costs rose significantly throughout PJM, particularly in the PSEG zone,’’ said Stefanie Brand, director of the Division of Rate Counsel. “Most of the population will see an increase. It’s just another increase in people’s bills.’’

As in the past, Brand said the results point to a need to look at the cumulative impact of all the factors boosting costs to consumers, such as the nuclear subsidy, efforts to modernize the grid, and the push to promote clean-energy alternatives. “It all adds up,’’ Brand said.

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For the most part, prices in the capacity auction were higher than the previous year, nearly doubling to $140/megawatt-day for much of the PJM footprint, which includes 13 states and the District of Columbia and serves 65 million people.

PJM officials blamed the spike in prices on transmission limits and continuing low energy prices, which leads generators to seek revenues in the capacity market through higher offers. Wholesale energy prices have two components: energy, or the electricity generated by the plants, and capacity, or the reserve margins to meet demand when it is high.

Capacity accounts for less than 20 percent of the wholesale price of energy, according to Stu Bresler, a senior vice president of operations at PJM.

Nuclear challenges

Beyond the prices, the auction continued to reflect the challenges facing the nuclear industry. Exelon, the nation’s largest owner of nuclear plants, announced yesterday three of its nuclear units did not clear the auction. FirstEnergy also had three nuclear units that failed to make the cut.

All told, PJM said the auction cleared 19,900 megawatts of nuclear generation, about 7,400 megawatts less than last year’s auction. “I don’t think that came as a surprise to the market,’’ Bresler said in a teleconference call with reporters on Wednesday.

Another significant trend from the auction is the continued growth of nontraditional sources of capacity, including demand response (where companies reduce energy usage), energy efficiency, and renewables.

Doug O’Malley, director of Environment New Jersey, said the results showed that utilities are being squeezed by energy efficiency, demand response, and renewable energy.

“PSEG’s auction prices are the highest in the PJM, so it shows we need to focus on renewable energy and energy efficiency,’’ he said.