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Discussing PJM, Capacity Auctions and PLCs

June 10, 2016

June 2016 Edition: Through the Reliability Pricing Model, PJM establishes the price which Load Serving Entities (or LSEs, such as AEP Energy) must pay in order to ensure that generators are always available to meet customer demand. PJM accomplishes this by conducting auctions which match supply and demand at a set clearing price.


Educational Topics

What is PJM’s capacity market?
PJM Interconnection (PJM) is the Regional Transmission Organization that administers wholesale power markets and sets reliability rules in your state. Reliability is accounted for as a component of your supply cost called Capacity. PJM ensures year round, reliable power supplies by securing commitments from generators to deliver energy whenever it is needed to satisfy all customer demand on the power grid. PJM accomplishes this through what’s called the Reliability Pricing Model. Regional Transmission Operators must plan for energy demand during peak periods such as extreme weather conditions during the winter and summer seasons, ensuring reliability at all times.

Through the Reliability Pricing Model, PJM establishes the price which Load Serving Entities (or LSEs, such as AEP Energy) must pay in order to ensure that generators are always available to meet customer demand. PJM accomplishes this by conducting auctions which match supply and demand at a set clearing price.

How do the capacity market auctions work?
The initial, base auction (known as the Base Residual Auction, or BRA), occurs three years prior to the delivery year.

PJM also conducts three additional auctions after the BRA, approximately once per year in advance of the planning period, in order to more precisely match supply and demand as load forecasts are improved. These are termed Incremental Auctions, and they are limited to releasing generator commitments that are no longer required, or securing additional commitments that may be required, as a result of changing load forecasts. These auctions can affect final Capacity prices modestly. The schedule for these is as follows:

  • September of calendar year – Two years prior to delivery year (for example, September 2016 for delivery year 2018/2019)
  • July of calendar year – One year prior to delivery year (for example, July 2016 for delivery year 2017/2018)
  • March of delivery year (for example, March 2016 for delivery year 2016/2017)

What components impact your capacity cost?
The following components listed below have an effect on how your capacity costs are calculated.

  • Peak Load Contribution (PLC): PLC is the factor by which your utility establishes your reliability requirements for the following year, based on your usage during peak load periods. This is described in more detail below.
  • Forecast Pool Requirement (FPR): Reflects the reserve margin to account for load spikes or higher than expected generator outages.
  • Zonal Scaling Factor: Accounts for the differences between forecasted and purchased capacity versus actual capacity demand based on PLC. In essence the Zonal Scaling Factor is a “true-up”.
  • Capacity Price: Final Zonal Capacity Prices and Scaling Factors are set after the third incremental auction. It accounts for PJM gains or losses on excess capacity sold back or deficient capacity purchased.
  • Number of Days: The number of days in the calendar year when calculating your annual capacity cost.

How is your Peak Load Contribution (PLC) established?
Peak usage typically occurs during the hottest summer months (June through September). To calculate your PLC, PJM determines the five highest system peak demand hours on the grid, which is referred to as Coincidental Peaks or 5CP. During these selected dates and hours, PJM, along with your local utility will identify your contribution to those peak load hours and determines your PLC. The local utility will identify your average usage during these five Coincidental Peaks, which will establish your PLC for the following delivery year (June 1 through May 31).

AEP Energy can help you reduce your capacity costs when you join our Peak Management Alert Program. By participating, you may reduce your demand, and ultimately our PLC, thus reducing future energy costs. AEP Energy Peak Management Alert is designed to inform you of likely Coincident Peak hours (5 hours in PJM) to help manage your capacity obligation for the coming year. Notifications will be sent out by 2:00 p.m., EPT, a day before the predicted event and a confirmation email by 12 p.m., EPT of the following day. Contact your sales representative for more details.

AEP Energy is a competitive retail electric service provider affiliated with American Electric Power. AEP Energy is not soliciting on behalf of and is not an agent for any AEP utility.

Copyright © AEP Energy, Inc. All Rights Reserved.

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