Got Clean Energy? Not So Much from PJM’s Latest Auction

May 24, 2017/ Jennifer Chen / Climate, Conservation, Natural Resources Defense Fund, Oceans, Resources

Published by the Natural Resources Defense Fund

While the rest of the world scales up clean energy, the electric grid operator running the world’s largest market procuring future commitments to deliver electricity is continuing to rely primarily on fossil fuels and nuclear. PJM, the grid operator serving 65 million electricity customers in 13 Mid-Atlantic and Midwestern states and the District of Columbia, released its latest auction results today showing that procurements in solar, wind, and demand response (customers voluntarily curtailing electricity use for compensation) fell compared to last year. These results follow unsurprisingly from PJM fully implementing its new rules that discriminate against clean energy resources in favor of gas and nuclear power plants.

The auction price was not as high as it could have been due to a large amount of supply (mostly natural gas) flooding the system and falling electricity demand. But consumers are still paying more than they should—both because PJM is procuring too much in total and procuring fossil-fuel and nuclear resources that are more expensive than clean energy. In fact, only about 7% of the resources procured were wind, solar, or demand-side resources (where customers commit to using electricity more efficiently).

PJM’s capacity auctions are not procuring what its customers want

PJM’s capacity auctions procure power to meet future demand in its territory. The auction is conducted three years before the electricity is delivered to give conventional power plants construction time. (Newer, cleaner resources don’t need as much of a lead time.) Energy resources sell commitments (or “capacity”) to supply power or reduce customer consumption in the future by offering competing bids into the auction. These resources include coal, gas, nuclear, wind, and solar power, as well as services that pay customers to reduce electricity use when the grid is stressed. The resources with the lowest bid prices clear the auction first, and PJM continues to procure additional resources until its projected future demand is met. More resources competing in the market tend to reduce prices.

Unlike a normal market where customers choose what they want to buy and how much, PJM’s capacity market only offers one kind of product (and consumers must buy a certain amount)—regardless of their preferences for emissions-free or local energy resources. Customers must buy whatever resources win bids in the market (which increasingly is gas).

Capacity resources with seasonal attributes, like wind, solar, and demand response, are largely excluded from the capacity market because there is an arbitrary requirement that capacity can only be transacted in year-long increments. This inflexible approach precludes resources that are otherwise highly reliable for parts of the year—PJM could do better by procuring resources that commit to shorter periods that together cover the full year. For example, a summer and winter capacity period of six months each (commitment periods that track the seasons) would enable solar and customers’ smarter use of air conditioning (which are more available in summer) and wind (which is strongest in winter) to participate in the capacity market.

What PJM procures starkly contrasts with what PJM’s customers and states want. This year, PJM procured a capacity mix with about 0.6% wind and solar, but the states in PJM’s territory support much greater amounts of clean energy as demonstrated by their renewable portfolio standards (ten states in PJM and DC have them) and their participation in the Regional Greenhouse Gas Initiative. Also, polls have shown strong bipartisan support for accelerating clean energy adoption, and the vast majority of people in all PJM states and DC support requiring their utilities to produce at least 20% of electricity from renewables.

Market rule changes from last year

This year’s auction was the first to fully implement PJM’s controversial new rules that prefer annual resources and discriminate against seasonal resources. Market bids offering wind, solar, landfill gas, and river-based hydroelectric power fell by 3,400 megawatts, and demand response offers decreased by 2,085 megawatts this year.

While all capacity resources must commit to annual periods, summer-only and winter-only resources can pair to form annual resources. This idea sounds good in theory, but it doesn’t account for the fact that electricity demand in PJM is highly seasonal—electricity demand during an extreme summer is about 26,000 megawatts higher than the demand during an extreme winter. It also doesn’t account for the fact that there are many more summer resources in PJM that could cost-effectively and reliably satisfy PJM’s higher summer demand.

The auction results bear out expectations that seasonal resources would be severely limited from competing in the market. Summer resources did not fare as well as winter resources in PJM because there are many more summer resources, and they cannot all find winter resources to pair with. Notably, the amount of demand response procured this year fell by 24% compared to last year, and solar fell by almost 63%; both of these resources tend to be stronger in the summer. Wind procurements fell by 8%, which is a large decrease but not as severe as that for summer resources because some of the winter wind combined with summer resources to become annual resources. While some seasonal resources could combine into annual capacity, it’s notable that these resources are insignificant compared to the total capacity procured, making up only about 0.2% of the total procured this year.

While PJM intended its capacity market reform to improve reliability, the new rules penalize the very resources that came to the rescue during a grid emergency. Recall that demand response and wind resources compensated for failing coal and gas plants to keep the lights on during the Polar Vortex of 2014, the event that sparked the genesis of these new rules.

Despite the new rules limiting cheaper, clean energy resources from competing in the market this year, falling demand and an abundance of supply contributed to prices lower than expected. Electricity demand fell by 3,273 megawatts and nearly 18,000 megawatts of extra supply on the system offered into the auction but did not win a capacity commitment.

PJM normally procures extra capacity (around 16.6%) just to be safe, but this time, PJM obtained a record-high excess of 23.9%. The excess above the 16.6% safety margin is about 11,000 megawatts. To get a sense of what this means, 11,000 megawatts amounts to maintaining an extra 22 coal or gas plants (at 500 megawatts each) or 11 nuclear plants (at 1,000 megawatts each)—which consumers are paying to keep online at tune of at least $300 million per year (which doesn’t include the higher prices paid by customers living in transmission constrained zones).