PJM's 2020-2021 capacity auction results

PJM Interconnection -- the operator of the wholesale electricity market serving mid-Atlantic and eastern states -- has reported its latest capacity auction results.  PJM's 2020/2021 Reliability Pricing Model Base Residual Auction was the first auction since PJM applied new capacity performance requirements to all resources.  While some areas yielded higher prices due to transmission limits and retiring generators, most of the PJM footprint yielded a clearing price of $76.53/megawatt-day for 2020/2021 -- about 24% lower than last year's auction price for the 2019/2020 delivery year.

Like most other capacity market constructs, the PJM capacity auction is designed to provide a price signal and a forward commitment process that allows new entry to participate or existing units to retire with forward notification.  Securing future capacity revenues can be an important element in supporting project finance for newly built resources.

PJM has had several forms of capacity markets over the years.  Since 2007, its "Reliability Pricing Model" or RPM has featured annual auctions, through which generators and other resources offer to commit to delivering capacity in three years.  The auction is called a "Base Residual Auction," because it covers what's left of anticipated regional needs after any utility- or customer-specific self-supply and bilateral capacity deals are counted.

The recent 2020/2021 auction, covering the period June 1, 2020, to May 31, 2021, was notable in several regards.  It was the first in which all resources were subject to capacity performance requirements which have been phased in over time.  Under these rules, generation, demand response, and energy efficiency resources must perform when dispatched, with few excuses for non-performance.  Failure to perform when dispatched will lead to significant charges for non-performance, meaning resources should not make forward commitments lightly.

The recent auction was also the first to see participation by Price Responsive Demand resources -- a form of demand response in which resources react to market prices by curtailing grid load. The auction was also the first base residual auction held under the provisions of PJM’s Enhanced Aggregation filing.  Under these provisions, which were accepted by the Federal Energy Regulatory Commission in March, seasonal resources may aggregate into a year-round resource -- for example, combining winter-peaking wind generators with solar and demand response resources whose capacity is best in the summer, yielding an aggregated resource that could clear in the market.

In all, PJM says it procured 165,109 megawatts of resources, covering its anticipated residual needs with a 23.3% reserve margin. 2,350 megawatts of new gas-fired generation cleared, suggesting the selected projects may actually be built.  7,532 megawatts of demand response resource cleared -- a notable decrease from previous years' demand response participation rates, explained largely by the newly imposed year-round performance requirements.  1,710 megawatts of energy efficiency resources also cleared, as did 504.3 megawatts of wind, 119 megawatts of solar, and 398 megawatts of aggregated seasonal resources.