Energy Insider

Electric« Back to Energy Insider

Electricity: Hard To Predict: PJM’s Capacity Auction Results

By Matthew Rose, Enerdynamics Instructor

Amidst great anticipation and even some concern, the PJM Interconnection concluded its capacity auction at the end of May. The Reliability Pricing Model (RPM) auction is designed to procure power supplies three years into the future, with the latest auction securing capacity for the June 1, 2017 to May 31, 2018 delivery year.


PJM administers the RPM auction each year to ensure forecast electricity requirements for the PJM system three years in the future with prices established through competitive bidding. The auction reflects pricing from a range of available conventional supply sources: fossil fuel and nuclear plants competing with renewable energy, demand response (DR), and energy efficiency. The forward basis for the auction ensures long lead times for builders to complete asset construction or upgrades.


2017-2018 auction results

The just-completed auction procured 167,004 megawatts (MW), which includes a 19.7% reserve margin for the PJM RTO. The capacity clearing price for all resources throughout the entire RTO was $120 per megawatt-day. The exception is PSE&G's service area where prices came in at $215 per megawatt-day. The PSE&G location appears to be the only capacity-constrained area in the auction. This reflects a notable price increase over the prior year’s auction result and came as a surprise to many who had predicted lower prices.


The results also depict changes in the types of resources clearing the auction. As shown in Table 1, the auction includes a significant share of demand response resources as part of the cleared resource pool. A total of 10,975 MW of demand response was procured — a decrease of about 1,433 MW from last year's auction.


However, there was a significant shift to the types of demand resources that have more flexibility and a greater contribution to reliability. There was an increase in PJM “annual" and "extended summer" demand resources clearing in this auction. This shift gives system operators more year-round flexibility when needed. PJM experienced the need for flexible demand response during recent extreme weather, both in September 2013 and January 2014.




The shift to increased amounts of new natural gas-fired generation continues with roughly 4,800 MW of new combined-cycle generation clearing for the first time in this auction. Almost all of this cleared new capacity is located downstream of west-to-east transmission constraints or in areas with capacity needs.


Energy efficiency continues its growth trend in PJM's capacity auctions. This year, a record 1,339 MW of energy efficiency was procured in the auction, an increase of 222 MW from last year's auction.


Historical PJM RTO cleared capacity price

The RTO estimate of $120 per megawatt-day continues the trend of widely divergent capacity prices over the past five years. As shown in the graph below, the cleared capacity price for 2017-2018 auction is dramatically higher than last year’s auction when it cleared at less than $60 per megawatt-day.




            2017/2018 RPM Base Residual Auction Results, PJM DOCS #794597


According to various financial forecasts and industry watchers there was a predisposed view that prices would remain depressed as a result of low natural gas prices and a slow economy with limited demand. The fact that the RTO price cleared $120 caught many by surprise.   


Reasons behind the auction prices

Although capacity costs typically account for less than 20% of a customer’s electricity bill, the higher RTO capacity prices are beneficial to producers who rely on these payments as baseline revenues. Especially given the lower prices from last year's auction, the higher prices in this year’s auction are viewed as financially beneficial to suppliers.


According to many of the industry analysts, the higher capacity market prices in the 2017-2018 auction were affected by a number of changes in the RPM rules that were approved prior to the capacity auction.

  • FERC approved PJM’s proposal to cap the amount of limited and extended summer demand response that can clear its capacity market auctions. The new rules cap the amount of limited and extended summer DR at 10% of PJM’s reliability requirement, with limited DR providing no more than 4%. This reduced the magnitude of DR resources available to be bid on in the auction.

  • FERC approved PJM’s efforts to place limits on the amount of power that can be imported into the RTO. The ruling limited power imports at 6.3 gigawatts (GW) as compared to 7.5 GW of imports that cleared in the prior year’s auction. The net decline in imports impacted the availability of imports that could clear in the auction.

In addition, there was a change in bidder strategy for some plant owners. Exelon — owner of the Byron, Quad Cities, and Oyster Creek nuclear stations announced that none of these generating plants cleared PJM’s auction. According to Exelon, their bids were limited to cover their “go forward” full marginal costs (as approved by the market monitor) in contrast to bidding in plants at a zero cost. This limited the available capacity in the RTO and increased the overall capacity cost. There have been some complaints that Exelon’s bidding strategy works in their favor by increasing the overall capacity value for their units that did clear the auction.


We will have to wait until next year to see whether higher capacity prices are a trend or an anomaly.



Want to gain a more clear understanding of how electric markets work? Enerdynamics’ public seminar Wholesale Power Markets and online course Electric Market Dynamics are two great ways to quickly gain knowledge of electric markets.



  • Bloomberg News, Electricity prices will rise to ensure U.S. power grid can meet long term demand, May 27, 2014PJM Press Release, PJM Capacity Market Secures New And Diverse Resources To Meet Future Electricity Demand, May 23, 2014
  • RTO Insider Capacity Prices Jump Following Rule Change, May 27, 2014
  • John Funk. PJM auction shows surge in gas-fired power plants on the way. Cleveland Plain Dealer, May 25, 2014
  • Julien-Dumoulin Smith, RPM Results The Power Trade Is Back. UBS Research Report, May 23, 2014
  • UBS Electric Utilities Global Research. Monitoring PJM’s Markets: A Discussion With the Market Monitor, June 2, 2014
  • UBS Electric Utilities Global Research. Lessons Learned From the Capacity Auction in PJM, June 2, 2014
  • PJM Interconnect. 2017/2018 RPM Base Residual Auction Results, May 23, 2014


Click here for more information or call 866-765-5432 Fan us on Facebook Follow us on Twitter

Enerdynamics Corporation • 3101 Kintzley Court, Unit F • Laporte, CO 80535 • (866) 765-5432 • info@enerdynamics.com

Legal: The Energy Insider and the content within include statements, opinions and analysis relating to energy industry topics of interest. The purpose of this newsletter is to apprise readers of industry trends and news. The information contained in this newsletter is provided as general information for educational purposes. Enerdynamics takes no responsibility for the accuracy of forward-looking statements or opinions of third-party sources.

Unsubscribe Forward