Price drop in PJM 2023/2024 Base Residual Auction

The prices seen in the 2023/2024 BRA were at or near historic lows. The RTO price was the lowest since the 2013/2014 Delivery Year, where the price was $27.73/MW-day, and the third lowest ever. The MAAC price was the second lowest ever, only above the $40.80/MW-day value from the 2007/2008 Delivery Year, which was the first-ever BRA and in which MAAC was not modeled separately from RTO. The EMAAC price was the lowest ever, and this was only the second time where EMAAC cleared below $100/MW-day, with 2022/2023 being the first.  

The key market drivers and dynamics were in-line with expectations. There were minimal changes on the demand-side between the 2022/2023 and 2023/2024 BRAs, with the changes coming predominantly on the supply-side. Many of these supply-side changes may have resulted from market developments, legislative developments, and regulatory developments that occurred in the past year. We discuss these developments and the resulting supply-side changes below.  

Rise in commodity prices. The past year has seen a huge increase in commodity prices throughout the energy sector. The increases seen in natural gas prices are especially relevant, as natural gas prices are a primary determinant of power prices. Figure 2 below highlights the indicative PJM spark spread trends seen in the forwards for the 2022/2023 and 2023/2024 Delivery Years. (NOTE: Values are calculated by averaging monthly forwards prices across the Delivery Year. Spark spreads are calculated using a 7,000 Btu/kWh heat rate.) This illustrates the substantial increase in forward power price and spark spread expectations that has occurred in the past year. If resources are anticipating higher energy margins for the 2023/2024 Delivery Year, then their capacity price requirements should decrease, all else being equal. 

Revisions to the MOPR. A new version of the Minimum Offer Price Rule (MOPR) went into effect in September 2021, following the absence of FERC action on the PJM proposal. This latest MOPR only applied to a small set of resources compared to the expanded MOPR that was previously in place. (NOTE: PJM has stated that 79 MW were subject to the MOPR in the 2023/2024 BRA, compared to 12,030 MW that was subject to the MOPR in the 2022/2023 BRA, excluding exempt resources). As a result, many resources that were subject to the MOPR in the 2022/2023 auction were now able to offer freely, increasing their likelihood of clearing in the auction.  

Revisions to the MSOC. FERC directed PJM to implement a new version of the MSOC in September 2021. The latest MSOC resulted in offer price ceilings that were significantly lower than those from 2022/2023. Resources that wished to offer above their default offer price ceiling were allowed to request a unit-specific price, which would be developed based on the unit-specific costs and expected margins and subsequently reviewed by the IMM. In theory, this should still allow resources to bid “competitively,” i.e., at prices reflecting their net avoidable going-forward costs. However, it is possible that resources were unable to offer at the price levels they would have otherwise wished to, which may have put downward pressure on prices. If the prices are at unacceptably low levels, resources do have the ability to permanently exit the market, though this an extreme and largely irreversible decision that resources are unlikely to make lightly.  

Expanded support for nuclear generation. As part of the Illinois Climate and Equitable Jobs Act, passed in September 2021, nuclear subsidies were expanded to preserve the COMED nuclear fleet. As a result, the Byron and Dresden nuclear generators cancelled their plans to retire; they were previously scheduled to retire in September 2021 and November 2021, respectively, and due to this did not clear in the 2022/2023 auction. Meanwhile, on the federal level, the Infrastructure Investment and Jobs Act, passed in November 2021, included funding for a Civil Nuclear Credit Program, to be operated by the Department of Energy (DOE). Under this program, the DOE will support the continued operations of merchant nuclear generators that are at risk of retirement.   

Increase in cleared nuclear capacity. All the offered nuclear capacity cleared in the 2023/2024 auction, following several years where some nuclear capacity failed to clear, due to both unfavorable economics and MOPR impacts. Compared to the previous auction, cleared nuclear capacity increased by 5,820 MW. Nuclear economics are likely bolstered by the recent increases in commodity prices, as this may result in substantial increases to their energy margins, provided that nuclear fuel prices do not change as quickly as natural gas or coal prices. This development, along with the nuclear-related policy changes and the revisions to the MOPR, likely made it so that nuclear capacity was willing to clear in the auction, regardless of the price. This may have been particularly impactful for LDAs such as COMED or EMAAC where nuclear economics have been a driver of price separation in past auctions.  

Increase in cleared capacity from new resources. A total of 3,330 MW of capacity was procured from new resources in the 2023/2024 auction, while another 405 MW was procured from uprates to existing resources, with the majority of this capacity likely coming from gas-fired resources. PJM reports that CCGT capacity increased by 3,627 MW, despite the low prices. This was consistent with expectations. During the period between the 2021/2022 auction, held in May 2018, and the delayed 2022/2023 auction, held in May 2022, several new CCGT projects closed financing and started construction, comprising over 7 GW of capacity. Some of these projects were not expected to come online until later in 2022 or early 2023, and thus the 2023/2024 auction was likely their first time participating in the PJM capacity market. Some projects also failed to clear in the 2022/2023 auction due to the MOPR. As these projects had all already made the decision to enter the PJM market, they were likely willing to clear in the auction, regardless of the capacity price. With the revisions to the MOPR, there were no longer any market rules preventing them from offering as price takers to ensure that they clear in the 2023/2024 auction.   

Decrease in cleared capacity from fossil fuel resources. The increase in cleared capacity from existing nuclear resources and new resources was largely offset by a decrease in cleared capacity from other existing resources, particularly coal and other fossil fuel resources. Cleared capacity from coal resources decreased by 7,419 MW compared to the 2023/2024 auction, despite offered coal capacity also decreasing by 8,590 MW. Cleared capacity from oil resources decreased by 300 MW compared to the 2023/2024 auction. Cleared capacity from gas resources increased in total by 2,314 MW compared to the 2023/2024 auction. New generating resources and uprates to existing generating resources contributed a total of 3,735 MW, with the majority likely coming from gas-fired resources, indicating that the cleared capacity from existing gas-fired resources likely decreased. While the decrease in cleared capacity from existing fossil fuel resources was enough to largely offset the increase in cleared capacity from existing nuclear resources and new resources, it was insufficient to sustain the prices at or above the levels seen in the prior auction.   

Lower than projected offers from existing resources. There are several potential factors that may have limited the offer prices of existing resources. As mentioned previously, the rise in commodity prices over the past year may have increased the expected energy margins for resources during the 2023/2024 Delivery Year, and made resources willing to accept lower capacity prices, all else being equal. The revised MSOC may have restricted resource offer prices significantly, though this is difficult to say given the information currently available. The compressed auction timeline may also have limited resource offer flexibility, as holding the auction less than a year prior to the start of the Delivery Year might result in resources having limited ability to exit the market, postpone expenditures, etc.  

Though PJM currently has significant amounts of excess capacity relative to the target reserve margin, the capacity fleet is facing headwinds in the mid-term due to:

• Increased renewable penetration. Renewable penetration is expected to increase substantially, which is readily evident from the interconnection queue that is overwhelmingly comprised of renewables and storage. The increase is driven by state policy mandates, increasing market demand, and improving resource economics. This will likely reduce energy margins for existing resources, making them increasingly reliant on capacity revenues to recover their costs, and ultimately driving retirements. While renewables will contribute some incremental capacity, they do not have the same degree of capacity contribution as existing thermal resources.
• Aging capacity fleet. The existing capacity fleet is also aging, with resources likely facing increasing costs, again increasing reliance on capacity revenues.
• Environmental regulations. Tightening environmental regulations are also putting pressure on existing resources; for instance, many coal resources have announced plans to retire by the late 2020s rather than make investments to comply with recent federal rules. State policies and regulations also have the potential to drive significant retirements, such as the NOx and SO2 measures passed in the recent Illinois legislation.

Given the significant amount of capacity that is at risk of retirement in the mid-term, PJM could very well end up in a similar situation to what we are seeing today in CAISO, ERCOT, or MISO, with reliability challenges and elevated resource adequacy costs, particularly if the market is less willing to invest in new fossil fuel resources, or if there are not significant technological advancements in and increases in the deployment of long-duration clean energy resources.   

The PJM capacity market is at a crossroads. Changes to the near-term outlook for nuclear resources and further entry of new resources, especially from CCGTs, have exacerbated the current capacity surplus. At the same time, mid-term headwinds suggest that substantial amounts of capacity, particularly coal and other fossil fuel resources, will likely exit the system, while increasing renewable penetration will likely make any remaining resources increasingly reliant on capacity revenues. These trends may nevertheless take some time to play out. On top of this, the current commodity market situation has driven power prices to previously unexpected heights, and it is unclear how long this situation will persist. With both immediate-term energy market upside and mid-term capacity market upside, existing resources may be hesitant to exit the market, especially given the accelerated timelines for the next few auctions. This suggests that the current capacity surplus may persist for the near future, potentially delaying any substantial recovery in capacity prices from the levels seen in recent auctions.