Raymond Gifford
One of the teenage pranks involved taking a brown paper bag filled with dog poop, lighting it on fire on the victim's porch, ringing the doorbell, running away, and waiting for the stinking hilarity that ensues.
Then there are the latest results from the PJM capacity auction.
While the outcome of the capacity auction is less stinking or childish, it promises to spark a political, regulatory, and consumer fire unlike any joke. What's more, if exogenous forces outside the PJM regulatory structure (such as permitting delays, policy hostility to dispatchable resources, and financing challenges) intervene, capacity price increases will cost consumers money while still failing to address capacity shortage problem.
First, the results: RTO regional clearing prices rose nearly tenfold from $28.92 per megawatt day to $262.92. Meanwhile, the settlement price in the Baltimore region was $466.35 per megawatt day, up from $73.00 in the previous auction, and the settlement price in the Dominion region was $444.26 per megawatt day. While some of PJM's active generators may be coming online soon, customers will face higher electricity bills as PJM tries to bring more capacity to the market for delivery in 2026.
While PJM's top-down design price formation bears only a fleeting resemblance to true bottom-up price formation (from willing sellers to willing buyers), the sharp rise in capacity prices sends a clear signal : PJM’s production capacity is clearly insufficient. This shortage means electricity prices in the region will rise significantly as consumers end up paying for this new capacity. Still, when capacity prices fluctuate so much, it raises two questions for customers and regulators:
1. Will these new capacity auction prices be successful in attracting a new generation to the market?
2. Will policymakers and customers tolerate severe shocks to capacity price swings, or will they push for regulatory and political changes?
Whether the capacity auction results will be successful in attracting new generations to the market (or convincing older, inevitably hot assets to stay in the market) is a tricky question. The mismatch between capacity markets for the next three years and new asset investments lasting 20, 30 or 40 years has always been a challenge for capacity market designers.
As an investor, would I put hundreds of millions or billions of dollars into an asset that is only guaranteed to pay for three years of production? Particularly for dispatchable thermal resources, when policy and political forces aim to strand the asset sooner rather than later, will high-capacity payments over three years trigger a commitment to recoup capital over decades? For new nuclear investment, the market viability of existing nuclear units in RTOs is so precarious that many countries choose to subsidize their nuclear generation. Even for a hybrid renewable/storage generation project, with the value of recognized capacity reduced and historical capacity market prices fluctuating over the years, will there be a financial impact on the project?
To be sure, there are different risk appetites among investors. Perhaps the generous capacity payments awaiting generators in this auction will attract a new generation to the system. But even those with an appetite for risk are swayed by the practical barriers to completing projects within PJM's footprint.
The political economy of the auction outcome will be equally unstable. While the entire PJM footprint will face higher prices, Maryland and Virginia in particular will see capacity costs rise sharply. Both states have adopted national policies to “correct” PJM's shortcomings, with Virginia regularly hinting at withdrawing from PJM entirely. Predictably, the political economy of soaring electricity prices is not good for current politicians. Ask former governors Bob Ehrlich (MD) and Gray Davis (CA) how electricity price shocks have affected them.
A final question about the political economy of the auction outcome lands on FERC's doorstep. Chairman Phillips and Commissioner Christie are former supervisors within PJM's practice. Does FERC consider the auction’s price results to be “fair and reasonable” because the market has made its stance clear? Or will they open the hood of the auction and see if the money taken out of consumers' pockets will spark new capacity that will produce a just and reasonable outcome?
There are no easy solutions to PJM's capacity crisis. The results of the auction were so shocking that a good Marxist would celebrate them as “exacerbating contradictions” in order for a revolution to come. For the non-Marxist analysts among us, we can hope that some serious scrutiny and forethought can help put out the flaming bags of shit left on the porch of PJM's footprint.
Raymond Gifford is a former chairman of the Colorado Public Utilities Commission and managing partner of the Denver office of the law firm Wilkinson Barker Knauer.
This article was originally published by RealClearEnergy and provided via RealClearWire.
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