By Rich Heidorn Jr. and Suzanne Herel
PJM generators will earn $10.9 billion from this year’s capacity auction — a 45% jump from last year — in the first test of the RTO’s new Capacity Performance requirements. But some merchant generators smarting from low gas prices and competition from wind say that’s not enough for what ails them.
Securities analysts said the results will boost earnings for Exelon, Dynegy, NRG Energy, Public Service Enterprise Group, Calpine and Talen Energy.
The results have particular implications for Exelon’s Illinois nuclear fleet and American Electric Power’s potential sale of its merchant fleet.
Exelon: Retirements Still on the Table
Exelon announced Monday that three of its nuclear plants in PJM failed to clear the 2018/19 auction, including the 1,819-MW Quad Cities plant in Illinois, the second year in a row that it failed to clear. Company officials say they may retire Quad Cities if the Illinois General Assembly does not pass legislation that would boost revenues for the company’s nuclear fleet.
Exelon must notify PJM by September of any plants it won’t offer into the May 2016 Base Residual Auction for delivery year 2019/20.
Quad Cities, which has lost about $300 million over the last six years, is expected to lose about $50 million annually, according to Joseph Dominguez, executive vice president for government and regulatory affairs at Exelon.
Analysts from UBS Global Securities called Exelon “the clearest ‘winner’” in the auction because of its assets in both the ComEd zone, where prices hit $215/MW-day, and EMAAC, which cleared at $225/MW-day.
But Dominguez said the increase in capacity prices was a “marginal improvement” for Exelon’s generation. “What we got today is important, but it’s one year’s worth of revenue,” he told the Chicago Tribune on Friday. “We have to see a sustainable path forward.”
FirstEnergy spokesman Mark Durbin echoed Exelon Monday, saying PJM’s rule changes “resulted in clearing prices that really come closer to the operating costs of plants. But it’s only representative of one year; we’re not sure how reflective it is of long-term trends. It is a snapshot in a one-year time frame.”
Capacity revenue represented less than one-fifth of energy market revenue in PJM in 2014.
The results also did not help Exelon’s money-losing Clinton, Ill., plant in MISO. Exelon faces a December deadline for informing MISO if the 1,065-MW plant will be shut down before the planning year beginning June 1, 2016.
Seeking Help from the States
Exelon wants Illinois legislators to approve legislation that would require utilities to purchase credits from low-carbon generators including nuclear and wind. Illinois lawmakers did not take action on the Low Carbon Portfolio Standard before the spring legislative session ended, but they may consider it in November.
AEP and FirstEnergy also are seeking aid from state officials. The companies have asked the Public Utilities Commission of Ohio to approve above-market purchase power agreements from their coal generators.
PUCO has scheduled evidentiary hearings beginning Sept. 28 to consider the request from AEP, which is hoping to boost the value of its merchant fleet for a possible sale. (See Cold Weather, Low Gas Prices Drive AEP Earnings.) The commission is expected to consider FirstEnergy’s “Electric Security Plan” proposal as part of a rate case later this month.
In FirstEnergy’s second-quarter earnings call, CEO Chuck Jones cited PJM’s capacity market changes and the Ohio ESP as “key initiatives [that] will drive the near-term financial strategy” of the company.
Meanwhile, Dominion Resources won approval from the Virginia legislature in February for a nine-year rate freeze, meaning it won’t have to share the rise in capital revenues with ratepayers. Dominion said it wanted to suspend its biennial rate reviews to provide it and customers with “rate stability” as it responds to the Environmental Protection Agency’s Clean Power Plan.
While Dominion is assuming the risk of increased compliance and operating costs, analysts said the freeze allows the company to retain an additional 5 to 8 cents per share of earnings from PJM capacity revenues.
Transition Auctions
With the first auction under PJM’s new rules behind them, generators are now turning their attention to this month’s CP transition auctions for the 2015/16 and 2016/17 periods.
PJM will hold a transition auction on Wednesday and Thursday to obtain CP resources for 60% of the updated reliability requirement for delivery year 2016/17. Results are expected Monday, Aug. 31. The transition auction for 2017/18 (70% CP) will be Sept. 3-4, with results posted Sept. 9.
Participation is voluntary and open to any resource able to meet CP requirements, regardless of whether the resource cleared in the BRA for the delivery year.
FirstEnergy’s Jones said the transition auction results will have a big impact on how much the company is willing to spend to boost its plants’ reliability.
“We need to see where both the Base Residual Auction and then where in particular the transition auctions clear, because those are the more imminent,” he said. “For the Base Residual, you got three years to figure how to get your units reliable for that one. The transition auctions are a little more pressing in terms of time.”
UBS is predicting CP resources will clear the two auctions at about $120/MW-day, a “modest risk premium” to the base capacity resources, which cleared at $59/MW-day for 2016/17 and $120/MW-day for 2017/18 RTO-wide.
Other Generators
PSEG announced that its planned Sewaren Unit 7 had cleared the auction — the only new generation in EMAAC. The company said it plans to begin construction on the $600 million combined-cycle plant in early 2016. The company said it will replace the nearly 70-year-old Units 1, 2, 3 and 4.
PSEG said it cleared about as much capacity as in the 2014 auction, with all but one unit clearing as CP.
Talen declined to share the details of its offerings, but spokesman George Lewis said, “In general, we see the CP product as a positive, and the results from Friday are generally good and certainly within what was expected. It met most people’s expectations.
“Our view is it’s a partial picture at this point,” Lewis said. “We’ll find out more next week and the week after what the outcome of the [transition] auctions will be, and whether the results of the [BRA] will change the way generators or capacity resources will view bidding into these capacity auctions.”
Dynegy and Calpine had no comment on the results. AEP, NRG and AES did not respond to requests for comment.
A Calpine spokesman noted, however, that 4,600 of its 5,700 MW of PJM generation is in either ComEd or EMAAC.
Stocks Tumble
PJM generators saw their shares drop slightly on Monday, but it was a day when the market was down across the board on fears of economic weakness in China. The Dow Jones industrial average finished the day down 588 points, or 3.6%.
Exelon closed the day down 1.1% at $32.64 after an intraday high of $33.54. Dynegy was down 2.4% at $24.71, with an intraday high of $26.51. NRG shares dropped 1.8% to close at $19.22 after seeing an intraday high of $20.36. PSEG closed down 3.31% at $40.65, with an intraday high of $41.83. Calpine dropped 3.82% to close at $15.87, with a high of $16.76.
Talen saw the biggest slump, 4.7%, which brought its shares down to $15.17.
