Payouts for U.S. Power Generators Plunge in Biggest Market

  • Results may affect valuations for takeover candidates
  • First auction to include plant backed by state subsidy

Payments to power generators for supplying the largest U.S. electricity grid plunged to a four-year low.

Suppliers will receive $76.53 a megawatt-day for the year starting June 2020, based on the results of a so-called capacity auction held earlier this month, grid operator PJM Interconnection LLC said on its website Tuesday. That’s down from $100 in last year’s sale. Analyst estimates compiled by Bloomberg ranged from $85 to $130.

With the sector reeling from record-low power prices and flat demand, the results could help determine valuations for companies such as Dynegy Inc. and Calpine Corp. that have been linked to takeover speculation. This year’s sale drew extra scrutiny because it’s the first time a nuclear plant receiving state subsidies was vying for payouts. Bidders also had to be prepared to supply the grid on the hottest and coldest days of the year for the first time.

“This may be the most closely watched auction” since they started more than a decade ago, Kit Konolige, a New York-based analyst for Bloomberg Intelligence, said in a research note, citing a wave of new gas plants coming online that could depress prices.

Dynegy was down 5.3 percent in after-market trading at $7.75. Calpine fell 1.1 percent to $12.97.

The auction, which was held from May 10 to May 16, cleared 165,109 megawatts of generating capacity. Costs are passed along to households and businesses on their utility bills. The reserve margin -- or supply buffer -- rose to 23.3 percent from 22.4 percent last year. 

The grid operator said 2,389 megawatts of new generation was selected in the auction. That compares with 5,374 megawatts of new capacity that cleared a year ago.

PJM, based in Valley Forge, Pennsylvania, serves more than 65 million people in 13 states. In the last decade, it’s been at the center of the shale gas revolution that’s displaced coal as the nation’s number one fuel source.

Here are the other highlights of the auction:

  • Payments were awarded to 7,820 megawatts of demand response, compared with 10,348 megawatts a year earlier.
  • “The big story is that more demand response cleared than people were expecting,” Toby Shea, a senior credit officer for Moody’s Investors Service Inc., said by phone. “The idea was that the capacity performance requirement would drive it down, but most of it stayed.
  • Costs fell in Exelon Corp.’s ComEd utility zone, which includes Chicago. Payments to generators in that region were $188.12 a megawatt-day, down from $202.77 in last year’s auction. They rose to $187.87 for the Eastern Mid-Atlantic Area Council region of the PJM grid from $119.77.
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