North America: PJM capacity prices defy expectations

23 May 2018 - 12:00 am UTC

PJM Interconnection’s latest auction yielded capacity prices of USD 140 per MW-day, an 83% jump from last year’s results, defying analysts’ and investors’ expectations.

This price reflects what generators could expect to earn in capacity revenue in delivery years 2021-2022 in RTO, the largest zone in PJM Interconnection.

Investec’s Co-Head of Power Ralph Cho called the results a “blowout,” saying that this “breathes life into greenfield projects” in PJM. Last year’s low capacity price results had likely slowed down construction, causing a balancing effect on this year’s prices, he added.

PJM Interconnection, which released results on 23 May, attributed the higher prices to continuing low energy prices, which caused generators to try to recoup revenue by bidding in higher capacity prices, and a reduction in the number of new bidding generators.

A total of 163,627MW in generation capacity in RTO cleared this year’s auction, representing a 22% reserve margin, according to PJM. The full report can be seen here.

Equity investors would have greenlighted new projects with a capacity price at USD 80 per MW-day, according to Cho. Ravina Advani, managing director at BNP Paribas, pegged that floor price at last year’s USD 76.53 per MW-day.

Most analysts had projected a flat to slight improvement in prices this year. PA Consulting Group’s energy & utilities advisor Trevor McManamon told Inframation that his group expected relatively flat pricing, forecasting USD 70-80 per MW-day in RTO. S&P Global Ratings’ Senior Director Aneesh Prabhu had projected prices at USD 90-100 per MW-day in that zone, citing recent power plant retirements.

The latest results will bring back the old projects that were stalled and waiting for stronger market signals, Cho said. Furthermore, owners of existing generators in PJM are likely to take advantage of these prices by refinancing at lower rates, increasing leverage or reducing the 100% cash sweep, he added. It could also lead to more sponsors considering asset sales.

As reported, some greenfield power projects in PJM have been on hold because equity investors wanted to see the outcome of this year’s capacity auction before committing capital. “Results will have to come out higher – and materially higher – than last year to restore confidence in the market,” Advani said, in an interview before the capacity auction results were announced.

Capacity prices in all other zones were higher than RTO’s. Eastern MAAC (EMAAC), which includes New Jersey, Maryland, Delaware and the eastern part of Pennsylvania, had a clearing price of USD 165.73 per MW-day, a slight decline from last year’s USD 187.87 per MW-day. ComEd, which represents the northeastern part of Illinois, had prices cleared at USD 195.55 per MW-day, a jump from the previous year’s USD 188.12 per MW-day.