On Friday, May 23, PJM Interconnection, the regional transmission organization that provides wholesale electricity to our region, announced the results of its base residual auction, or BRA. The auction, which set the capacity clearing price for the delivery year beginning June 2017, cleared at a price of $120 per megawatt-day.
What is capacity?
Electricity is different from many commodities because it cannot be economically stored in large quantities. Electricity has no shelf life; it must be produced and consumed simultaneously. For this reason, there must be sufficient generation — enough “capacity” — to produce electricity when demand on the grid is at its peak. If the amount of electricity generated is insufficient to meet demand during these peak times, the lights go out.
In order to ensure there is sufficient capacity, all customers pay capacity costs, either directly or indirectly, as a component of their electric bills. Capacity costs are determined by periodic auctions run by PJM, the wholesale electric market that serves Ohio and many other Midwest and East Coast states. The most important of these auctions, the BRA, is held each May and sets a clearing price for a delivery year three years in advance. A delivery year runs June to May.
Most Ohio energy users are paying capacity costs amounting to a few tenths of a penny per kilowatt-hour. However, as a result of the BRA held in 2012, users in FirstEnergy-Ohio territory may pay upwards of three cents per kilowatt-hour for the delivery year beginning June 2015. Capacity will become the second-largest bill charge for many users, second only to the energy component itself.
ATSI zone constraints resolved
Under ideal circumstances, each BRA would set capacity costs for the entire wholesale market. However, as a result of aggressive Environmental Protection Agency regulations, several coal-fired power plants in Northern Ohio and Northwest Pennsylvania are being deactivated. Because these local closures do not impact the entire PJM region, PJM carved out an independent zone to address extreme intra-region capacity constraints. This zone, called the American Transmission Systems Inc. (ATSI) zone, includes all of FirstEnergy-Ohio territory.
In the BRAs held in 2012 and 2013, the ATSI zone set a separate clearing price that was significantly higher than the rest of the region. In the 2012 BRA, the ATSI zone clearing price was $357 per MW-day, compared to $136 for the rest of the region. The 2012 BRA set the clearing price for the delivery year beginning June 2015. In the 2013 BRA, the ATSI zone clearing price was $114 per MW-day, compared to $59 for the rest of the region. The 2013 BRA set the clearing price for the delivery year beginning June 2016.
In the most recent BRA, the ATSI zone did not set a separate clearing price relative to the rest of PJM. This means that the zone no longer suffers from localized capacity constraints compared to the rest of the market. The price we are paying in FirstEnergy-Ohio territory will be the same — not higher — than the rest of PJM.
High capacity prices in FirstEnergy-Ohio territory through at least May 2018
At $120 per MW-day, the most recent clearing price is 66% lower than the unprecedented ATSI zone clearing price set by the 2012 BRA. While the price is slightly higher than the zone’s clearing price set by the 2013 BRA, it reflects that the region has taken necessary steps to ensure additional supply. These steps include transmission line upgrades and new gas-fired generation.
However, the clearing price is still high in comparison to past auctions. For example, the BRA held in 2009 cleared at approximately $16 per MW-day, while the BRA held in 2010 cleared at about $28 per MW-day.
Managing capacity costs
Interval-metered customers can take measures to reduce their capacity cost exposure. A customer’s share of the BRA clearing price is based, in part, by its electric consumption during the five hours out of the year when demand on the electric grid is at its highest. Many companies like Brakey Energy help their clients take steps to manage consumption during probable grid peaks. Taking these steps will continue to be very important for end users in FirstEnergy-Ohio territory given the results of the last three auctions.
The BRA auction results announced last week ensure relatively high-capacity costs will stay with the region through at least mid-2018. The recent period of low capacity costs is gone for the foreseeable future. It is more important now than ever that users take steps to manage their cap.