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Can PJM’s Power Capacity Market Overhaul Drive a Revenue Rebound?


By Jonathan Crawford  |  December 5, 2023

PJM Interconnection, the regional transmission organization (RTO) that manages the largest wholesale power market in the U.S., is pushing for an overhaul of its multi-billion-dollar annual capacity auction. Two draft proposals are currently under review by the Federal Energy Regulatory Commission (FERC). It is PJM’s hope that, if approved, the proposed changes will help lift revenues from record lows and shore up the capacity market, as accelerating retirements of gas- and coal-fired power plants threaten to undermine the RTO’s grid reliability by the end of the decade. In this Energy Market Insight, we explore some of the bullish factors behind PJM’s capacity market reforms, which could drive a rebound in payouts for merchant generators.

In its annual capacity auction, PJM purchases commitments from generators for the supply of capacity typically three years in advance. Revenue from the market is intended to ensure both sufficient generation and an extra cushion of reserves will be in operation in future years to maintain reliable electric service during periods of peak energy demand. Starting in 2016, PJM also phased in its Capacity Performance program, an initiative aimed at rewarding high-performing generators during system emergencies and penalizing those that fall short of fulfilling their capacity supply commitments.

PJM’s draft rules are fundamentally aimed at mitigating risks and boosting incentives in its capacity auction and Capacity Performance program to the benefit of capacity market participants, especially conventional generators. On risk mitigation, PJM proposes to provide capacity market sellers with more flexibility to factor into their supply offers the risks posed by incurring non-performance penalties. Given the large magnitude of fines assessed against non-performing generators during Winter Storm Elliott – totaling $1.8 billion – capacity sellers may be inclined to tack on substantively higher risk premiums under PJM’s plan, which may ultimately drive-up auction clearing prices.


PJM also proposes to provide more clarity on how generators can reflect in their supply offers the incremental costs from the risks associated with offering additional megawatts of capacity from a single plant. Taken together, the flexibility and discretion afforded to market participants in factoring market risks and penalties points to higher clearing prices.

On the incentive side, PJM proposes measures intended to better reward power plants participating in its Capacity Performance program that over-perform during system emergencies. Specifically, PJM’s plan would render ineligible for the bonus payouts demand-side resources, such as demand response and energy efficiency resources, as well as generators that lack a capacity supply commitment – comprised largely of intermittent renewable generators. Restricting bonus eligibility would lead to a larger bonus pool for those eligible resources that over-perform.

In a separate but associated draft proposal before FERC, PJM seeks to further refine the methodology used to quantify a generating resource’s contribution to resource adequacy, a value that determines the proportion of a plant’s installed capacity that can be offered into the capacity auction. PJM seeks to switch to a so-called marginal Effective Load Carrying Capability (ELCC) accrediting methodology, which values the incremental resource adequacy benefit of adding an individual resource to the expected system portfolio while also factoring in resource adequacy risks during the winter. Currently, PJM uses averaging in its ELCC analysis, which estimates the amount of power demand that, on average, each generator can serve when the system is at peak load, among other factors.

The effect of the change would be most pronounced for solar generators – the resource with the fastest growth rate on the PJM grid. Solar resources would see an even steeper reduction in the proportion of a unit’s nameplate capacity that could be offered into the market as compared to the existing approach. As the chart below illustrates, applying PJM’s revised ELCC methodology to its operating solar resources, as well as planned projects further along in development, would lead to an incremental cut in capacity in the next auction of as much as 8,950 megawatts (assuming all such plants become operational and bid into the market). Such a steep reduction in generating capacity from resources that typically bid in at the lowest levels could help mitigate against any downward pricing pressure that may otherwise occur from the large influx of solar generators. By contrast, PJM proposes a class rating for natural gas-fired combustion turbines and combined cycle plants of 74% and 87%, respectively.


Accounting for as much as a quarter of all power market revenues, capacity markets serve as a critical source of earnings for existing and planned generators, supplementing revenue from the energy and ancillary services markets. However, as the chart below shows, capacity market revenues in the last three auctions have hovered at a decade low.

PJM’s latest draft reforms could put the market on a stronger footing for higher prices, ultimately sending a positive price signal to prospective power plant developers. This would be a welcome move for PJM, as the pace of retirements of thermal resources has been outpacing the construction and interconnection of new resources, which are projected to lead to thinning reserve margins by the end of the decade.


Still, a fight could loom over the proposal, which has sharply divided stakeholders. Merchant generators and industry trade groups are urging FERC to fast track the approval, arguing the changes are critical in light of the declining reserve margins and the outsized risks posed by performance penalties. On the other hand, the market watchdog, consumer advocates, and public interest groups have lodged protests to have the reforms scaled back or rejected. They argue that the changes will provide generators with too much discretion to raise prices, which will come at the expense of ratepayers, without providing commensurate reliability benefits.

PJM asked FERC for its proposal to become effective on December 12, as PJM seeks to implement the changes in time for the next auction scheduled for June 1, 2024, for the 2025/2026 delivery year.


BTU Analytics is a FactSet Company. This article was originally published on the BTU Analytics website.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.


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The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.