Power Plany Payments Jump as PJM Seeks to Avoid Blackouts

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The largest U.S. grid will boost payments to electricity suppliers by 37 percent to avoid blackouts from heat waves or cold snaps.

PJM Interconnection LLC said Friday that payments to generators for the year starting June 2018 will be $164.77 a megawatt per day, based on results of a capacity auction held earlier this month. That’s up from $120 for the previous 12 months reached in an auction last year and the highest in eight years.

The payments rose after federal regulators approved a plan allowing PJM to penalize generators that fail to supply the power they’d promised. The rules are aimed at preventing a repeat of the unplanned plant shutdowns and fuel shortages that sent prices soaring during the frigid winter of 2014.

“I think this is a positive step forward, but it wasn’t a dramatic shift,” said Toby Shea, vice president and senior credit officer for infrastructure finance at Moody’s Investors Service Inc. in New York. “It’s a pretty decent result for existing generation because a lot less new generation came in than feared.”

The results fell within a range of analyst estimates. Wood Mackenzie Ltd. projected that the payments would rise to $155, while Tudor Pickering Holt & Co. forecast $175.

Capacity costs were set at higher levels for two regions because of supply constraints. The eastern mid-Atlantic region, including New Jersey, Delaware and Pennsylvania, cleared at $225.42, while prices in Exelon Corp.’s ComEd utility territory rose to $215.

‘Good News’

“I have to tell you, all these generators have really taken a beating in the market and this is the first piece of good news in a long time for them,” said Jay Rhame, a vice president and portfolio manager who co-manages about $2.8 billion in utility and energy infrastructure securities at Reaves Asset Management.

Exelon, which has plants serving Chicago and the mid-Atlantic region, NRG Energy Inc., Dynegy Corp. and Calpine Corp. were the biggest winners of the auction, according to UBS AG and Macquarie Capital (USA) Inc.

Under the new rules, the grid operator can impose penalties of about $2,800 per megawatt-hour on generators that fail to deliver promised megawatts during emergency hours, Michael Lapides, an equity analyst for Goldman Sachs Group Inc. in New York, said in an Aug. 13 note to clients.

Suppliers that are exempt from the rules because of physical limitations that keep them from meeting the performance standards, representing about 20 percent of the supplies in the auction, saw capacity payments clear at $149.98.

Cost Increase

The cost of securing the supply commitments rose to $10.9 billion from $7.5 billion in last year’s auction.

“I think the results are consistent with ours as well as analysts’ predictions,” Stu Bresler, vice president of market operations for PJM, said in a conference call with reporters Friday. The auction results “were pretty much right smack in the middle of the ranges.”

The grid manager secured 166,837 megawatts of power supplies in the auction, down from 167,004 megawatts in last year’s auction, in part because the grid operator cut its demand forecast.

The grid’s reserve margin, or supply in excess of projected needs, widened to 19.8 percent from 19.7 percent in last year’s auction, higher than the target of 15.7 percent. New power plants accounted for 2,919 megawatts, comprised mostly of natural gas-fired generation, falling short of last year’s 5,927 megawatts, PJM said.

Demand Response

Capacity secured from demand-response providers, where factories to office buildings and households promise to curtail usage during peak periods, rose 1 percent to 11,084 megawatts. About 86 percent of these supplies will receive bonus payments, Bresler said.

PJM, based in Valley Forge, Pennsylvania, serves more than 61 million people from New Jersey to North Carolina and west to Illinois. A megawatt is enough electricity to power 1,000 homes, according to the grid.

“The stronger requirements for capacity performance represent an insurance policy for consumers against capacity shortages and dramatic price spikes,” PJM Executive Vice President Andy Ott said in a statement Friday. “The auction prices are in line with the costs of securing this dependable capacity.”

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