Capacity prices in the PJM interconnection have seen a steep decline in the last two auctions. But Wood Mackenzie’s Power and Renewables team expects the upcoming 2021/2022 capacity auction will clear at a territory-wide price of $103/megawatt-day, a 35 percent increase over last year’s base residual auction.

Wood Mackenzie and GTM Research provide some insight into how recent market events are impacting price and the future outlook for capacity markets.

It’s all about nuclear: A power plant closure in Ohio and Pennsylvania and subsidies in Illinois and New Jersey

Even before FirstEnergy’s announcement that it will close nuclear power plants serving Ohio and western Pennsylvania, investment in transmission upgrades were taking place in the region to ensure delivery of electricity into the territory. This created escalating prices in Commonwealth Edison’s locational deliverability area, while prices RTO-wide cleared well below $100/megawatt-day, according to Wood Mackenzie.

Nishit Pande, a senior power and renewables analyst, expects an RTO-wide price recovery to coincide with the completion of these infrastructure upgrades, which are slated to be complete before 2021.

"Transmission build-out to resolve local constraints will help low-cost non-local resources to commit capacity into Com Ed [territory]. At the same time, this also implies that relatively higher-cost resources will set the RTO-wide price,” said Pande.

Last month, nuclear subsidies were approved in Illinois and New Jersey, which could push prices to $90/megawatt-day, while baseload nuclear retirements and bidding behavior could push prices to as high as $120/megawatt-day, according to Wood Mackenzie’s short-term outlook.

Wood Mackenzie expects offered coal and nuclear capacity to fall by 5 and 13 percent respectively. "Cleared" coal and nuclear capacity could be anywhere between 10 and 25 percent of offered capacity. The fall in coal and nuclear capacity creates greater need for other fuel types.

Baseload Coal and Nuclear Capacity Expected to Offer and Clear the 2021/2022 Auction

Source: Wood Mackenzie

Renewables are mandated; fuel diversity will be integrated further into market design

State policies are stoking the integration of renewables and other technologies. New pricing rules may indicate more changes to come in capacity markets.

“More accommodative market frameworks that incorporate state policy initiatives [represent] a step change from the past,” said Prajit Ghosh, head of Americas power and renewables research at Wood Mackenzie. “While shrouded in uncertainty regarding timing and likelihood, these rules could be early signals of a new market design paradigm. These changes could be early flags of flexibility around further baseload subsidies or support systems for renewable technologies.”

Last year, PJM undertook a study on the impact of distributed energy resources on grid reliability. “PJM has found that a certain level of diversity is necessary to foster flexibility and adaptability to mitigate risks resulting from equipment failure, fuel price volatility, supply disruptions, extreme weather and other unforeseen system shocks,” wrote Elta Kolo, research manager of GTM Research's grid edge practice, in a note on PJM’s recent findings about demand response and distributed energy resources.

This should all be good news for demand response and curtailment service providers

The decline in market prices led to lower revenues for demand response and curtailment service providers in recent years. In a quarterly analysis of ISO/RTO markets in the U.S., capacity market revenue for distributed energy resource aggregators in PJM has been declining by more than 20 percent per year since 2015.

Source: PJM, GTM Research

However, due to changing market dynamics and supportive policies, “These providers can expect to see some recovery in this delivery year as PJM continues to refine rules for DER participation,” said Kolo.

An increased focus on decarbonization and grid resilience, plus sustained pressure on energy margins, Ghosh noted, all point to capacity markets playing a significant role in charting the path forward.


Learn more about our North America power market fundamentals research here and our analysis of initiatives integrating distributed energy resources into ISOs/RTOs here.