by Ron Norman and Ethan Paterno, PA Consulting
Citing the likelihood of sustained low natural gas prices and pending environmental regulations as the primary drivers of their decision, 15,000 MW of capacity has submitted deactivation requests to retire from PJM’s 2015-16 capacity auction. Most of this capacity—13,000 MW—submitted their request since February. The capacity is primarily coal-fired with some natural gas.
In January (before the 13,000 MW of announcements and the release of the final 2015-16 capacity auction parameters in early April), we projected price convergence across PJM with all capacity zones except The American Transmission Systems Inc. (ATSI) receiving a single, regional transmission organization (RTO)-wide clearing price. In addition, we forecasted RTO capacity prices on par with the previous year’s auction results. We still expect price convergence for all capacity zones except for ATSI, but it is evident that the incremental 13,000 MW of deactivations could result in a structural shift in RTO capacity prices with the potential for RTO capacity prices to reach upward of $190/MW-day.
ATSI deactivations likely will result in capacity premiums. ATSI capacity zone is second to American Electric Power Co. Inc. (AEP) in deactivation requests, with more than 3,000 MW. The impact of these retirements is twofold. First, it decreases the amount of installed capacity; second, it also decreases capacity transfers into the ATSI zone. The second impact is somewhat surprising, however. In very simplified terms, by decreasing the amount of installed capacity within the zone, voltage support is weakened, which decreases the zone’s capacity-import capability.
The combined effect of these impacts is that ATSI’s reserve margins are projected to be tighter than the RTO, which likely will lead to higher capacity prices than the RTO in the upcoming auction.
RTO capacity prices will depend on the number of retirements. All else equal, if 15,000 MW have submitted a deactivation request, 15,000 MW will retire.
The complicating issue, however, is that a generator’s deactivation request is reversible. If a generator submits a deactivation request and that request is accepted by PJM, the generator does not have to withdraw from the capacity auction.
The generator still may submit a sell offer if it decides at the last minute not to retire.
Consequently, there is some uncertainty surrounding the number of retirements. ATSI likely will clear at a premium to the RTO; ATSI capacity prices north of $250/MW-day would not be surprising.
This likely will be a short-term phenomenon, and ATSI prices could collapse to the RTO capacity price in the 2016-17 capacity auction primarily because of transmission upgrades.
RTO capacity prices will depend largely on the number of retirements. The retirement of 15,000 MW appears unlikely; however, retirements in the 7,000- to 9,000-MW range are possible, which could result in RTO capacity prices of some $160 to $190/MW-day.
Ron Norman and Ethan Paterno are energy industry specialists at PA Consulting Group. Visit http://paconsulting.com for more information.