PJM Interconnection LLC, the largest U.S. electricity grid, won approval by U.S. regulators for a plan to increase the reliability of power plants and avoid a repeat of the shutdowns and surging prices of the winter of 2014. Shares of power producers jumped.
The Federal Energy Regulatory Commission voted 4-1 to approve the “pay-for-performance” proposal from PJM, which runs the 13-state grid from the mid-Atlantic to the Midwest, with Chairman Norman Bay dissenting.
Under the plan, generators that promise to have capacity available during peak-demand periods will receive higher payouts than other plants and will, for the first time, be penalized for failing to meet those commitments. Dynegy Inc., which spent $6.25 billion last year on assets including power plants in Ohio, Pennsylvania and Illinois, rose 5.4 percent to $33.65, the biggest one-day gain since April 15.
“Power plants and other providers of capacity in PJM can expect higher capacity prices than under the previous system,” Jeff Plewes, a principal in the energy practice of Boston-based consultancy Charles River Associates, said in a phone interview Wednesday.
Power generators may qualify for higher payments from the grid in a bid to stoke investments in their operations. This comes after about 22 percent of PJM’s generating capacity went offline in January 2014. Coal plants saw their stockpiles freeze while natural gas plants couldn’t get enough of the fuel amid record prices. Customer billings more than tripled to $11 billion during the month versus an average month’s $3.3 billion.
NRG Energy Inc. jumped 3.2 percent to $24.62, while Exelon Corp. gained 3.2 percent to $34.18 and Talen Energy Corp. rose 3.1 percent to $19.09.
A typical residential electricity bill will increase by $2 to $3 a month when the program is in place in 2018, PJM estimates.
PJM, based in Valley Forge, Pennsylvania, said it will implement the new rules in a capacity auction for the year starting June 2018 on Aug. 10-14. The grid says the new plan will increase costs at the auction by $1.9 billion to $5 billion. The grid will use the payments to encourage owners to make their units more resilient to extreme weather, allowing them to run when others are forced to shut down.
Transitional auctions for years starting June 2016 and June 2017 will take place in July.
“As we expected, FERC is requesting only very modest changes” to PJM’s proposal, Stephen Byrd, an analyst at Morgan Stanley in New York, said in a note to clients.
Payments to electricity producers subject to the higher performance standards may reach $120 to $140 a megawatt per day across the market for the 2018 delivery year, Byrd said. Payouts to generators that do not commit to meeting the more stringent requirements may come within a range of $50 to $60. In last year’s auction, payments for the market reached $120 a megawatt per day.
Under current rules, there are no penalties for failing to meet supply commitments, and generators can still receive half of their capacity payments even if they fail to provide any of the power they’d promised, according to Joseph Bowring, president of Monitoring Analytics LLC, the independent market monitor for the grid based on Eagleville, Pennsylvania.
Plants that qualify for the higher payouts must be available for at least 700 hours of non-emergency operation during the year.
The capacity performance proposal “may result in billions in additional costs for consumers without achieving its intended aim,” Bay, the commission chairman, said in the sole dissent from the decision. Existing market rules have “worked tolerably well” for almost a decade, he said.
“A rational profit-maximizing resource could simply seek a capacity award in the auction, fail to perform during each performance assessment hour and likely pay a penalty less than the carrot it has received,” Bay said.
“The reforms put power plant owners at risk if they don’t operate, which will result in hundreds of millions of dollars in investments across the PJM fleet to harden power plants to operate, and reduce outages, during extreme weather,” Paul Elsberg, a spokesman for Exelon, the largest U.S. nuclear power plant operator, said in an e-mail.