The 2017/2018 base residual auction exceeded expectations of analysts and generation company executives, with annual resources clearing at $120/MW-day in most of PJM following rule changes that limited demand response and generation imports.

Prices in Virginia, West Virginia, North Carolina and much of Ohio doubled from $59/MW-day in last year’s BRA. The east was essentially flat, with the PSEG zone falling to $215/MW-day and MAAC up by less than $1. ATSI rose 5%.

Unlike last year’s auction, which saw the PSEG, ATSI and MAAC zones separate from the rest of the RTO, only the PSEG zone cleared separately. The auction procured 167,004 MW for the delivery year beginning June 1, 2017, giving the RTO a 19.7% reserve margin.

Six new combined-cycle plants cleared for the first time, all of them located east of the west-to-east transmission constraints or in other areas with capacity needs. In total, more than 5,900 MW of new entry cleared.

Reasons for Increase

In a press conference late Friday, Executive Vice President for Markets Andy Ott said the increase in clearing prices resulted from the costs of compliance with state environmental regulations and new limits on generation imports and summer-only demand response. (See related story, Major Rule Changes Reduced Imports, DR)

“I think the changes that we have made … certainly had their intended effect,” Ott said. “Anytime you have an auction with competitive new entry with this kind of volume, we look at that as a success story.”

Demand Response Changes

About 11,000 MW of demand response cleared, a drop of 1,433 MW from last year’s auction. Annual DR increased by 1,400 MW and extended summer by almost 4,700 MW, while limited summer-only resources dropped by more than 7,500 MW. Limited DR cleared between $14 and $80 lower than annual resources, which include generation, annual demand response and energy efficiency.

Ott touted the “dramatic shift” in DR. “All in all we saw it as a positive result that we got higher value DR,” he said.

Imports dropped to about 4,500 MW, down from 7,500 last year. Unlike last year, all of the imports came with firm transmission. All but about 500 MW cleared after winning exemptions from the import limits, which required them to also be pseudo-tied.

Exceeding Expectations

In first-quarter earnings calls before the auction, executives of PJM companies said they didn’t expect a dramatic rise in prices following the rule changes.

FirstEnergy officials said they were encouraged by PJM’s “modest reforms” but sought additional changes such as a premium for having fuel on-site, which could boost nuclear and coal plants. PPL CEO William Spence said there were too many variables to make any prediction on prices.

AEP CEO Nick Akins said he expected RTO prices of $80 to $100, while UBS Securities predicted RTO prices of $80 with MAAC flat at $120. Barclays Capital analyst Dan Ford accurately predicted that only PSEG would separate from the RTO, but his $100/MW-day target for MAAC and the RTO was also low. His PSEG target was slightly high at $229.

Below is a detailed analysis of the auction results.

Prices

Clearing prices remained volatile, with prices doubling in much of the RTO. For the first time in seven years, the RTO and all of the MAAC zones cleared at the same price.

Increased supply from new generation and uprates was offset by the drop in imports and demand response, PJM said.

Although RTO prices rebounded from last year, they were still below the $136/MW-day for 2015/16 and the all-time high of $174, set in planning year 2010/11.

Capacity Offered & Cleared

The nearly 179,000 MW of unforced capacity offered was down 3% from the total offered a year ago. An additional 21,300 MW was eligible but did not offer because it was exported, included in Fixed Resource Requirement capacity or excused due to environmental restrictions or pending retirement.

Generation was responsible for 93% of the cleared capacity, with DR providing 6% and energy efficiency 1%.

Almost 7,150 MW of “incrementally new” capacity was offered this year, including new generation, capacity upgrades to existing generation and energy efficiency. Generation capacity deratings and a reduction in DR offers exceeded the new capacity, however, resulting in a net decrease of almost 5,700 MW of installed capacity.

The cleared capacity for 2017/18 includes 5,185 MW of generation that postponed or cancelled retirement and 1,224 MW of reactivations.

Demand Response & Energy Efficiency

Demand response offered dropped 22% and cleared DR declined 12%, the second year in a row of declines. In all, DR offers have declined by 43%, and cleared DR by 26%, since peaking for delivery year 2015/16.

The biggest declines in cleared DR this year came in ATSI (-792 MW), PSEG North (-242), BGE (-145) and DEOK (-112). APS (+244) and COMED (+242) showed the biggest increases with AEP also up (+49).

Energy efficiency offered has increased by 43% over the two years, albeit from a much lower base.

About 97% of the demand resources and virtually all of the EE offered cleared.

The new limits on the volume of summer-only (limited) DR and extended summer DR that was permitted to clear changed the mix of DR clearing and resulted in price separation among the products. The volume of limited DR clearing dropped by three quarters, while extended and annual grew dramatically. Extended summer now represents nearly two-thirds of all capacity DR, up from 20% in 2016/17.

Annual DR cleared at the same price as generation, $120 in all but PSEG ($215). Extended summer DR also cleared with the annual products except in the PPL locational deliverability area, where it priced at $53.98/MW-day. Limited DR cleared at $40 in PPL, $201 in PSEG and $106 in the rest of the RTO.

New Generation

The auction received offers from almost 6,600 MW of what PJM terms “new” generation capacity, including new facilities, uprates at existing facilities and reactivations of plants scheduled for retirement that will be switching fuels.

Of the generation that was offered into the auction, 95% cleared.

The auction cleared 6,267 MW of new generation, the highest ever. Of that, 340 MW was in uprates to existing generation. The remaining 5,927 MW of new generating units included about 4,800 MW of gas-fired combined-cycle plants clearing for the first time. All of the new generation is located east of west-to-east transmission constraints or in LDAs that needed capacity.

Wind offers dropped 8% to 804 MW while solar increased 30% to 116 MW. All of the offers cleared.

The new generation helped prices in MAAC converge with the rest of RTO, PJM said.

Imports

Cleared generation imports dropped by nearly 3,000 MW to 4,526 MW, a reduction of almost 40% from last year.

Of the 4,526 MW, nearly 4,000 MW met the requirements for an exception from the capacity import limit (CIL).

The majority of the imports came from west of the RTO. PJM will export 1,223 MW of capacity. Before it began the capacity auctions, PJM was a net exporter of capacity.

The zones and their caps are:

• North (New York ISO & ISO New England): 1,598 MW (Light green on the map).
• West 1 (MISO East, MISO West & Ohio Valley Electric Corp.): 2,301 MW (orange).
• West 2 (MISO Central + MISO South): 767 MW (salmon).
• South 1 (Tennessee Valley Authority & LG&E Energy Transmission Services): 1,278 MW (orange-yellow).
• South 2 (VACAR — non-PJM): 2,493 (creamsicle).

Long-Term Impact

PJM credits the implementation of the Reliability Pricing Model for a net of 62,464 MW in capacity since its implementation.New generation and generation upgrades have contributed more than half of the increased capacity since the start of RPM, with demand response, imports and cancelled retirements making up the rest.

The 11 base residual auctions to date have procured almost 29,100 MW of new generation, more than replacing the 20,700 of de-ratings and retirements. Demand response to date has totaled almost 11,300 MW with energy efficiency adding almost 1,300 MW.

Combined-cycle plants have been by far the biggest source of new generation since the capacity market began with a total of more than 19,000 MW. Steam units and combustion turbines have each added almost 6,000 MW. Additions among other fuel sources were each less than 2,000 MW.