Lower energy prices and higher reliability are generally positive outcomes when it comes to electricity. But you wouldn’t know it looking at the response to the most recent PJM Interconnection auction.

Many generators and market analysts bemoaned the low clearing price in this year’s auction, which will serve the 2019-2020 delivery year. Prices hovered around $100 per megawatt-day for most of the region, compared to about $150 per megawatt-day in most regions for base capacity last year.

New combined-cycle gas plants pushed prices even lower than the expectations of many financial analysts. The outcome is bad news for power generators, especially many nuclear generators that did not clear the auction. But the increase in capacity has pushed reliability margins to an all-time high for PJM since the auction started 13 years ago.

Under new PJM rules that will go into full effect next year, any resources bid into capacity performance (CP) must be able to be called upon all year round or face stiff penalties. For this year’s auction, there is a combination of base capacity and CP. In the recent auction, CP prices were only about $20 per megawatt-day higher than base capacity prices.

The low prices were probably unattractive to some demand response capacity, which dipped from last year and reached a six-year low. Only about 6 percent of the approximately 10 gigawatts of demand response cleared as capacity performance.

FIGURE: Demand Response in PJM Base Residual Auction

Source: GTM Research 

While the low rates of demand response clearing as CP for the 2019-2020 auction may seem to be a cause for concern, it shouldn’t be an alarm, says EnerNOC CEO Tim Healy.

The spread between regular capacity and CP for 2019 was relatively low, about $20 per megawatt-day. More than 40 percent of demand response capacity, about 4.7 gigawatts, had the capability to meet CP requirements. Most of those resources didn’t regard the price incentive for CP this year was worth the extra risk. “They don’t obsess about energy and take the path of least resistance,” Healy said of most companies bidding in demand response resources through aggregators like EnerNOC.  

When CP is the only option next year, however, many more will bid into it. Healy acknowledged it was a customer education challenge for aggregators like his company to prepare clients for the new requirements that will be in place for the 2020 period.

PJM is also fairly confident that demand response will not fall off a cliff. “The amount that offered as CP of some sort is an indication that a significant amount of demand response was ready to take on the CP obligation,” said Stu Bresler, SVP of markets at PJM.

One bright spot is energy efficiency. While efficiency was only 1,515 megawatts in an auction that cleared 167,306 megawatts, 95 percent of that efficiency cleared the market as CP capacity, more than double the 613.7 megawatts of demand response that cleared as CP. Better accounting for energy efficiency and the flatlining of demand also contributed to this year’s low prices in PJM.

The Natural Resources Defense Council was far more bearish on the outlook for clean energy in PJM. In a blog post, NRDC cautioned, “wind,solar and demand response resources would mostly be eliminated from the capacity market if PJM continues with its planned implementation of its rules.”

Instead, there will be a learning curve for demand response and renewable resources and a need to get to know each other better. Clean energy resources will have to work together to offer the type of firm, year-round capacity that natural-gas plants can offer. “There is, of course, the option to aggregate with other resources to make a CP offer,” explained Bresler. “For example, summer-only DR could aggregate with [winter-peaking] wind power.”

In the short term, especially for next year’s market, there will likely be lower levels of demand response and renewables as everyone adjusts to the new rules. Prices may rise slightly next year, USB forecasts, mostly driven by coal and nuclear retirements.