Three Things Energy Buyers Should Know About PJM’s Capacity Performance Plan

December 14, 2015

On Aug. 10, 2015, PJM began implementing its new Capacity Performance plan to correct problems that occurred during the 2014 polar vortex when – at a time of record peak demand in PJM – more than 40,000 MW of the fleet’s 180,000 MW could not be delivered. Since then, the results of several auctions have been published, and load serving entities and their customers are beginning to see the cost impact of the plan’s promise to improve reliability.

While the exact outcome of the plan won’t be fully realized until 2018, there are three things businesses should know and understand today to effectively manage the current changes taking shape in PJM.

The Background
In January 2014, record peak demand in PJM – combined with freezing conditions that caused numerous generation failures and operational issues – left more than 20 percent of the region without power.

To enhance operational performance and ensure the greatest availability of generation resources, the grid operator drafted the Capacity Performance proposal, approved by FERC in June of this year. In short, the plan provides larger payments to generators that commit to having power available when demand is highest than to those that do not. If the generators receiving larger payments do not meet their commitments, they are – for the first time – penalized under a “no excuses” policy.

The Cost Impact
In the first auction under the new plan, PJM saw clearing prices for the 2018-2019 delivery year increase by 37 percent to $164.77 in most of its market. The overall cost of securing the supply increased from $7.5 billion last year to $10.9 billion. Two incremental auctions – one in August and another in September – resulted, respectively, in a $38.17/MW-day uplift to load or about $2.65/MWh for a 60 percent load factor customer, and a $27.69/MW-day uplift or about $1.90/MWh for a 60 percent load factor customer. (Energy users are assigned load factors based on an efficiency ratio of usage relative to peak demand.)

According to PJM, by the time the plan is fully implemented in 2018, the cost to the average customer will likely increase $2 to $3 per MWh across the grid operator’s footprint. A study released by the American Public Power Association (APPA), the organization representing community-owned electric utilities, concluded that the cost to customers could be as high as $7.3 billion over the course of the next three delivery years, with additional cost impacts in the future. Researchers estimated the additional costs to be $2.3 billion, $1.7 billion, and $3.3 billion, respectively, for the 2016-17, 2017-18, and 2018-19 delivery years.

Contracts in the New Planning Year
Given the change in the law and this revised cost of capacity, suppliers are now being forced to recover uplift costs from consumers beginning June 2016, when the 2016-2017 planning year begins. Some providers may lean on contract language to apply these charges, which could result in substantial sticker shock next summer when the new uplift capacity costs are reflected on monthly bills.

As part of our commitment to price transparency, GDF SUEZ Energy Resources’ practice is to accurately and correctly account for risk within the pricing model. Now that PJM’s auctions are over, pricing has been updated, and the current curves for PJM capacity reflect the changing landscape.

Other suppliers may not take this same approach. If you are considering contracts that lock in a portion of your load or your entire load in the planning year of 2016-2017, ask your supplier how costs will be impacted – and reflected on the monthly bill – as a consequence of PJM’s new Capacity Performance rules.

For more information on the issue, talk to a GDF SUEZ Energy Resources sales representative. Additional resources are also available by clicking here and here.