By Rory D. Sweeney
The rush to build new generation in PJM might be over, if analysts are correctly reading the tea leaves of yesterday’s PJM capacity auction results.
Base Residual Auction prices for Delivery Year 2020/21 fell to $76.53/MW-day in most of the RTO, down from $100 last year. ComEd dropped to $188.12 from $202.77, and MAAC, which cleared with the RTO at $100 last year, dropped to $86.04.
The only areas that saw price increases were EMAAC, which jumped to $187.87 from less than $120 last year, and Duke Ohio-Kentucky, which cleared at $130 this year after pricing with the RTO last year. (See Capacity Prices down in Most of PJM in 1st Year of 100% CP.)
“The silver lining here appears to be a meaningful slowdown in new capacity clearing the auction,” UBS analyst Julien Dumoulin-Smith wrote in a note published Wednesday. “While it’s been years that many generators have been speculating on just when the flow of new units would slow, this appears it.”
Less than 3,200 MW of new generation and uprates offered and just 2,824 MW cleared. Both results are down approximately 50% from last year’s auction. Clearing prices for 2020/21 ranged from only 26 to 66% of the net cost of new entry.
“To this end, we see the latest capacity prices and challenges in the debt markets as stymying any future efforts despite a clear backlog of future proposed plants,” he wrote. “We believe the market for new capacity is largely exhausted.”
Capitalizing on cheap fuel caused by an abundance of production in the Marcellus and Utica shale plays and pipeline constraints that limited takeaway capacity, developers flooded the market in recent years with new, highly efficient gas units that have depressed capacity and energy market prices. Low fuel prices persist, but the spark spread might not be as attractive anymore.
“I don’t see any economic justification for bringing a new power plant online” in these market conditions, ICF’s George Katsigiannakis said in an interview. “You start questioning what was driving all those builds: it was economics or it was just irrational expectations?”
Going forward, he said, “the market is going to rationalize and provide better returns,” but that will require unit retirements to reduce the excess capacity. With the onset of governmental initiatives to save certain units for socio-economic reasons, such as the zero-emissions credits passed last year in Illinois, and promote construction of others, such as renewable energy credits for solar and wind projects is several states, Katsigiannakis said “one of the most important issues” is how the oversupply will be curtailed.
“The intervention of state policies on the capacity market … how they can do it so they will not break down the market, is a different question,” he said.
Dumoulin-Smith agreed that he doesn’t “see any obvious easy fixes to improve prices” and that retirements appear to be a waiting game.
“The question is increasingly when will retirements materialize given the lower prices? We think any number of large legacy coal plants could see further pressure in [Pennsylvania and Ohio],” he wrote. “Even fully compliant larger plants could be at very clear risk across any part of the RTO footprint.”
He identified Talen Energy’s Susquehanna nuclear plant and Exelon’s Three Mile Island — which failed to clear the last three auctions — as potential casualties. He said Dynegy’s and FirstEnergy Solutions’ generation also is at risk.
Alternatively, he saw Public Service Enterprise Group, Calpine and Exelon as potential winners from the BRA, with their units concentrated in the higher-clearing locational deliverability areas.
Katsigiannakis said the “big surprise” was how much demand response was able to hang on despite the increased commitment demands of 100% Capacity Performance. He had expected DR to drop by about half from 10,348 MW to approximately 6,000, as that’s how much had year-round capability in last year’s auction. Instead, 7,532 MW cleared.
He said he’ll need to analyze the situation further to understand why so much additional DR was able to clear.