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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.

Market Updates

Jason Jarecki

May power and natural gas recap and recent forward market activity:

Natural Gas Prices

  • image descriptionMild weather resulted in weak spot market power prices this past month. The spot market is the value of energy that was first produced and then consumed each day for a certain period of time.
  • Consequently, there was limited support for natural gas prices and strong downward pressure on the value of power for the next year to two years going out.
  • The prompt month natural gas contract (June 2016 delivery in this case) settled at $1.96/mmbtu down $0.218 with the balance of 2016 down $0.02 to $2.559/mmbtu.
  • For future year natural gas delivery, 2017 was up $0.032 to$3.001/mmbtu, while 2018 was up $0.024 to $3.037/mmbtu.

Ohio/PJM – Power Prices

  • Mild temperatures in May, resulted in weak power prices with AEP-Dayton Hub On-Peak hours liquidating at $27.73/MWh for the month, about $4.51/MWh lower than where it was trading at the close of April.
  • Weak liquidations weighed heavily on the front end of the curve in power (we often refer to forward value of power as a curve) with Summer 2016 (typically referred to as July/August months) down $3.31/MWh to $38.80/MWh.
  • The softness (meaning lower prices) in power was also seen in the calendar year strips with 2017 down $1.31/MWh to $36.73/MWh and 2018 down $0.91/MWh to $36.25/MWh.

Illinois/MISO & PJM – Power Prices

  • Much like Ohio, power prices in Illinois remained very weak on a spot market basis for the month of May.
  • Two major retirement announcements have drawn attention for longer-term energy and capacity in the region.
  • Dynegy indicated they will likely be closing three Illinois coal facilities totaling more than 2,800 MWs by March 2017 due to non-recovery of their basic operating costs in the market.
  • Exelon indicated on June 3 they will likely be closing two nuclear facilities, Clinton (1,069 MWs) and Quad Cities (1,871 MWs) in coming years for similar reasons. This comes as the company is still negotiating a potential power purchase agreement with the Illinois Commerce Commission to save these plants.
  • These announcements may cause power and MISO capacity prices in the longer-term market to increase. The market is still digesting the ability for other generation resources to fill the potential void created and monitoring any potential legislation to preserve a portion of these MWs.

In summary, during May 2016, power and natural gas markets have generally been tepid based on the mild weather. For the short-term period, the market will concentrate on summer weather forecast if any changes arise. Meteorologists are prognosticating hot summer weather. As we look further out (one to two years), the Ohio energy marketplace remains weak for the time being with no major catalyst moving prices to the upside. However, developments in Illinois may impact the longer-term market to the upside. The market is still digesting the situation.

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.

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