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PJM Capacity Market
Status of Reforms and Lessons Learned
(resource owner perspective)
PJM Market Summit
Philadelphia, PA
September 7, 2016
Jeff Plewes
2
Topics addressed:
1 CRA Introduction
2 PJM Capacity Market Overview
3 Lessons from Recent Auctions
4 Looking Forward
Overview of CRA
3
Charles River Associates Energy Practice
• Founded in 1965
• 500 consultants specializing
in advisory or expert
services
• Offices in North America
and Europe
• Practice Areas include
• Energy
• Industrials
• Financial Services
• Life Sciences
• Consumer Products
• Practice formed more than 25
years ago
• Predominantly electric and
natural gas
• Advisory Service Offerings
include
• Market advisory and analysis
• Mergers and acquisitions
• Scenario planning
• Utility transformation
• Responding to de-
carbonization and other
regulatory issues
• Capital budgeting and
business planning process
CRA is an economic consulting firm that was formed more than 50 years ago, outside of
Boston, MA
Introduction
4
CRA has been involved in capacity market design, implementation and
evaluation on behalf of our varied clients
Introduction
• CRA has been actively involved in capacity markets in multiple RTOs since their
formation
• In PJM, we regularly evaluate future capacity price expectations through
fundamental analysis and detailed market modeling
• We participated in the design and implementation stages for Capacity Performance
(CP), the new performance incentives shaping the PJM capacity market
• We developed capacity offer strategies for multiple clients in each of the past two
Base Residual Auctions. This included the development of analytical models of CP
requirements and RPM outcomes.
• We remain involved in RPM developments, particularly those related to impacts of
subsidies
5
Topics addressed:
1 CRA Introduction
2 PJM Capacity Market Overview
3 Lessons from Recent Auctions
4 Looking Forward
6
Capacity markets – the “salad bar” at the metaphorical
PJM buffet restaurant
Capacity markets overview
• Following deregulation, PJM set up a buffet (energy market), attracting diners
(energy resources, investors) that had never seen a buffet in the U.S. before
• Did very well at first – could offer “steak night” (high energy margins) every night,
due to high gas prices
• During these good times, with many new diners, PJM added a salad bar (capacity
market), meant to complement the main courses, allowing PJM to compete with
neighboring restaurants (other RTOs) that also added salad bars
• Then some changes started that diminished the attractiveness of the main course
• Tour buses of new diners (renewables) started showing up and feasting on
the main courses, particularly during the early bird (off-peak) special hours
favorited by existing diners (baseload plants)
• Meanwhile, steak was no longer delivered (low gas prices)
• Management was told by the franchisers (member states) to include plate
limits (price caps) during peak hours and add other controls
• Even the improved dessert bar (ancillary services markets) wasn’t adding much
7
Many diners now focus on the “salad bar” for their primary sustenance…
Capacity markets overview
0
50
100
150
200
250
PJM - West PJM - ComEd ISO-NE NY-J
$/k
W-y
ear
Energy Margin A/S Revenue Capacity Revenue
*Indicative numbers for a new CC in each region. Energy margins represent CRA forecast. Capacity
margins represent 2019/20 cleared prices for PJM and ISO-NE and CRA forecast for NYISO.
Expected Gross Margins for New CC – 2019/20
• The importance of capacity payments has increased as energy margins have
diminished in most RTOs
• Energy margins are expected to be the largest share of total margins in PJM West,
but new CC builds elsewhere must rely more substantially on the capacity market
to cover total investment costs
8
The importance of the salad bar has led to significant reforms and
significant focus from current and future diners
Capacity markets overview
• The new house rules (Capacity Performance) have been designed to improve the
buffet offerings for dedicated diners, eventually kicking out the diners who can’t
pay their tabs
• Not convinced, many diners are hoping to fill up at the fast food restaurant next
door (State subsidies) before showing up at PJM buffet
• Though the health inspector (FERC) is wary…
• Some of the most prominent questions being asked:
• How much should the subsidized diners be allowed to take?
• Who gets a plate to the salad bar? (DR and EE? Intermittent resources?)
• What will the salad bar look like next year when the new rules are in full
effect?
• Why was the salad bar so disappointing this year?
9
Overview of PJM Capacity Market
Capacity markets overview
• Procures capacity to serve projected load plus a reserve margin
• Primary auction, the base residual auction (BRA), procures resources three years in
advance for a one year period (June 1 – May 31, the Delivery Year)
• Demand curve, called the variable resource requirement curve (VRR), is
administratively set on an annual basis
• Changed shape before the DY 2018/19 auction (held in 2015)
• Participation by PJM generators, imports, demand response, energy efficiency
• Each Locational Deliverability Area (LDA) has the potential to “break-out” and face
different prices from “Rest-of-RTO”, although only a few have historically
10
Overview of Capacity Performance
Capacity markets overview
• The greatest shift in PJM’s Capacity Market has been the shift to the Capacity
Performance (“CP”) paradigm
• Performance incentives for committed resources during scarcity/emergency
conditions (Performance Assessment Hours, or PAH). Requirements are year-round
(for full CP product)
• Under-performers pay penalties (~$3,000/MWh) and over-performers collect bonus
payments ($/MWh unknown prior to actual events)
• Significant offer price freedom for resources – can bid anywhere under a generous
offer cap
• Two year phase-in
• The 2015 auction (for Delivery Year 2018/2019) was first year with CP
• Resources could offer as Base or CP capacity
• Auction could clear up to 20% as Base capacity
• The 2017 auction (for DY 2020/2021) will be first year of 100% CP
11
Topics addressed:
1 CRA Introduction
2 PJM Capacity Market Overview
3 Lessons from Recent Auctions
4 Looking Forward
From the perspective of resource owners…
12
Recent Results
Signs of promise for higher prices for resources in the first year led to
disappointing results in the second year of CP
• Many generators pleased with first CP BRA results
• Prior to the recent auction, CRA provided a BRA Outlook that was pessimistic on
clearing prices relative to last year
• The results were at the very low end of our estimated range, and most generation
owners were not pleased with the outcome
Key Results from Last Two BRAs
Delivery Year 2018/2019 2019/2020
CP clearing price (“rest of RTO”) $164.77 / MW-day $100.00 / MW-day
Base Capacity clearing price $149.98 / MW-day $80.00 / MW-day
% of total MW cleared as Base Capacity 15.7% 16.1%
Cleared capacity 166,837 MW 167,306 MW
Installed reserve margin (including FRR) 19.8% 22.4%*
* Highest in RPM history by >2%
13
Recent Results
These prices are down significantly from the prior year, but not as low as in
some other years, despite a record reserve margin
-
20
40
60
80
100
120
140
2007-08 2009-10 2011-12 2013-14 2015-16 2017-18 2019-20
$/k
W-y
ea
r (n
om
ina
l)
Delivery Year
PJM - RTO PJM EMAAC PJM ComEd
PJM-ATSI PJM - SWMAAC
Historical RPM Capacity Clearing Prices ($/kW-yr)
*CP clearing prices shown for 2018/19 and 2019/20.
14
Generation
Demand
Response
Energy
Efficiency
155,443 MW
10,348 MW
1,515 MW
89%
13%
Base Capacity Capacity Performance Total MW
30%
94%
11%
70%
6%
89%
Recent Results
The share of Base Capacity vs CP varied significantly by resource type
Base Capacity vs CP Cleared by Resource Type (DY 2019/20)
15
Recent Results
There are many reasons for the price fall-off, all relating to supply and
demand factors, only some of which were known prior to the auction
• Demand – Load Forecast
• Major adjustment to PJM load forecast
• Equivalent to > 3,000 MW shift to left
$0
$200
$400
$600
130,000 140,000 150,000 160,000 170,000 180,000
2018/192019/20
• Supply – New Entry
• Significant entry of new gas capacity (representing 6,300 MW), outpacing
retirements by approximately 3,000 MW
Last 2 demand curves
New Generation and Uprates in Past 6 Auctions
MW
0
2,000
4,000
6,000
8,000
2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
New Generation Uprates
16
Recent Results
There are many reasons for the price fall-off, all relating to supply and
demand factors, only some of which were known prior to the auction
• Supply - Offer Behavior
• Some evidence of lower than expected costs for enhancing performance (cheaper
firm fuel contracts, dual fuel, etc.)
• Possible bids below going forward cost seeking “option value” of participating in
2020/21 auction – bets on the future making up for low current prices
• Several clear signs of questionable bid strategies in last auction
• Other possible strategies:
• Stickiness: “This is how I offered last year so I’ll just do the same this year.”
• Prediction: “This is where I think the auction will clear, so I’ll offer just below
that.”
• Retire/clear: “I will bid at a level that ensures that I clear until I’m actually
considering retirement.”
• And who knows what else…
17
Topics addressed:
1 CRA Introduction
2 PJM Capacity Market Overview
3 Lessons from Recent Auctions
4 Looking Forward
18
Looking Forward
The shift to 100% CP product brings upside potential, but bidding behavior
and new entry dynamics remain uncertain
• Assuming the load forecast remains stable, the main questions surround supply:
100,000
110,000
120,000
130,000
140,000
150,000
160,000
170,000
180,000
190,000
Offered Cleared
MW
Gen DR EE
17.8 GW did not clear
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
MW
Gen DR EE
Offered vs. Cleared Volumes Base Only Offers
1. Of the >30,000 MW of resources that offered as
CP but did not clear as CP (~16,000 MW cleared
as Base with coupled bids), how much still
offers and at what prices?
2. How much of the ~27,000 MW of cleared
Base Capacity (~12,000 MW which bid
as Base Only) will offer as Capacity
Performance, and at what prices?
Nearly 2/3 of uncleared gen is > 40yrs old
19
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
MW
CP
Resources
Base Gen
Base DR/EE
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
CP Resources Base Gen Base DR/EE
Regions with larger shares
of Base capacity than the
RTO as a whole
Total RTO Cleared Capacity Zonal Cleared Capacity by Type
Looking Forward
Future LDA pricing will be influenced by the relative shares of CP and Base
capacity as the 2020/21 auction moves to 100% CP
20
Significant developments to watch in the upcoming year
• The push to move Demand Response to the demand side and recognize EE only in
the load forecast
• Accommodating intermittent and seasonal resources
• Facilitation of aggregated bids – a highly underutilized option to date
• Move to a seasonal CP product?
• General market impacts, such as recovery of natural gas prices impacting going
forward costs
• Possibility of including carbon policy in the capacity markets
Looking Forward
21
Significant developments to watch in the upcoming year
• Moves to address possible subsidies for existing generators (and other resources)
• PJM has acknowledged the (possible) need for mitigation rules for all
subsidized generators (not just Ohio). MMU supports this.
• If mitigation is proposed, could use a going forward cost based view or an
opportunity cost based view
• Going forward costs - PJM’s default ACR values are very high. Mitigation based on
these values would likely lead to mitigated units not clearing
• Opportunity cost - More room for judgement. Both company-specific risk premiums
and company-specific expectations for CP outcomes
• PJM could split RPM into two resource classes, one for subsidized units and
one for competitive units.
Looking Forward
22
Discussion
23
Supporting slide: Monitoring Analytics’ 2019/20 BRA graph