PJM capacity auction results are out

by Robert Eberhardt

Yesterday PJM Interconnection announced the results of the annual base residual auction for capacity for the period of June 1, 2020 through May 31, 2021. For most of the PJM region, capacity prices cleared at lower prices that those set in last year's auction for June 1, 2019 through May 31, 2020. PJM's report on the auction results can be found here.

PJM coordinates the wholesale electricity markets in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. 

Every May PJM conducts an auction to set capacity prices for the delivery year starting on June 1 approximately three years in the future. Additional incremental auctions for the same delivery year are conducted as the start of the delivery year approaches.

For wholesale generators in PJM, capacity sales play an important role in determining overall project revenue and ultimately profitability. Capacity revenues are distinct from revenues derived from the sales of energy. 

For existing generators at the end of their useful life, clearing the auction can mean the difference between retirement and continued operations.

For new generators, clearing the auction is an important step on the path to securing financing and ultimately starting construction. But it also starts the clock, as cleared resources face financial penalties if they are not ready to operate by the beginning of the delivery year.

The PJM region has seen a boom in the development and construction of new combined cycle gas-fired generation projects over the last five years. Many of these projects have relied on project financing from commercial banks to pay construction costs. To the extent yesterday's auction results set lower than expected capacity prices, the terms of many of these financings may require projects to use available cash to repay principal faster than initially anticipated.