PJM's 2022-2023 Capacity auction is shrouded in uncertainty after delays and FERC inaction. How can you address it in your pricing?
Where We Are
As of this writing, the PJM Base Residual Capacity Auction, which should have been held in May 2019 is delayed indefinitely. FERC is still without a quorum to work on this issue and PJM has suspended any work related to the auction until FERC reaches a decision. For a start date of January 1, 2020, there are only 29 months of PJM capacity data available. Even after FERC issues an order on the capacity auction rules it will still take PJM time to implement the order and then conduct the auction, so this uncertainty is expected to continue.
How We Got Here
PJM proposed changes to the capacity auction design starting in 2022-2023 to attempt to account for state subsidized zero emission resources such as nuclear plants. There have been multiple proposals presented to FERC all while the clock is ticking and no resolution for the market.
Default Service Procurements
One source of public information about how market participants are handling this uncertainty is how the states are changing their processes to procure default service or standard offer service. Ohio removed a 3 year term from a recent procurement to avoid this uncertain period. New Jersey seems to be proceeding as planned with an auction scheduled for February 2020 procuring through May 2023. The states are concerned that any bidders for default service beyond where capacity price data is available will add additional risk premiums into their bid prices, which would then raise default service rates. If we get to more scheduled procurements and the base capacity auction has not been held we may see more changes to procurement schedules.
What to do for Pricing?
The most conservative answer is not to price any terms that go beyond the known capacity pricing, so nothing beyond May 2022. That would protect the supplier from pricing risk but it would limit sales opportunities and options for the customer. Another option is to offer only capacity pass through contracts that go beyond May 2022. A capacity pass through product would offer a customer a fixed cost for price components such as energy, ancillaries, RPS and transmission but then pass through the customer’s capacity costs as charged by PJM. This approach would limit a supplier’s price risk but does require additional effort to track and bill for the customer’s capacity costs. It also does not offer a customer price certainty. The final option for pricing is to make some assumption for capacity costs starting in June 2022 and assume the risk that capacity pricing for that period is unknown. This is the more aggressive approach but it allows the supplier to offer the customer a fixed price and price certainty. What is a reasonable assumption for the capacity price? That is going to depend on each supplier’s view of the market, risk management practices, and customer targets. Given the lack of price information, what constitutes a reasonable capacity price and forward risk assumption is currently more of a qualitative judgement than a quantitative analysis issue.
Contact TrueLight at email@example.com or 617-209-2420 for support in this area and to speak with our energy pricing experts to review options on how to handle the PJM capacity market price uncertainty.