The PJM Capacity Auction and Nuclear Energy

Matt Wald

The following is a guest post from Matt Wald, senior director of policy analysis and strategic planning at NEI.

There’s an important change in the electricity system that starts with an auction taking place this week. The organization holding the auction is big in the electricity world but you may never have heard of it, and the thing being auctioned is obscure, too, so let me explain.

The organization is called PJM, which once upon a time stood for Pennsylvania-Jersey-Maryland, but now it covers those states plus parts of 10 others. It runs the electric system stretching all the way from Delaware to Chicago. Some of the transactions it manages are second to second, some are in intervals of a few minutes. This one is year by year.

The thing being auctioned is not energy, but capacity. When you measure energy, you spin the little wheels on an old-fashioned electric meter. But capacity means the ability to generate. If you are a utility and you’ve got customers to serve in the PJM market, you have to buy capacity equal to the highest amount your customers are going to demand.

Capacity is a little like the size of the water pipes that a city builds. It doesn’t matter if you can supply enough water in 24 hours; you’ve got to supply it when its needed, or on a hot day, the fire hydrants and the toilets must not run dry. And somebody’s got to pay for that capacity, namely the water customers.

The same is true in electricity. Generators get paid for energy but they also get paid for capacity, for being ready to supply when you switch on your air conditioner or your microwave. Or the computer you’re using to read this blogpost.

PJM tracks this very carefully, and each day calculates the expected demand, and the amount of capacity on hand.

PJM has held capacity auctions for a while now, but this one is a little different, because PJM has changed the rules a bit. This year in this auction, you get paid more if you are a reliable generator. If you are a natural gas plant and you had to shut down during a polar vortex because you couldn’t get enough gas, or a coal plant that has to shut down when it can’t get enough coal, then you’re not a high-reliability supplier. Under the new rules, if you sell your capacity but then fall down on the job, you can face financial penalties.

We hear a lot lately about growing wind capacity. Wind can enter the capacity auction, but it’s discounted 87 percent. That means if you’ve got a 100 megawatt wind farm, it’s treated as 13 megawatts, because you can’t count on more than that. Solar is discounted 63 percent, which means if you’ve got 1 megawatt of solar, you can enter 380 kilowatts.

Why is this important? Because in PJM, the way you decide what power plants to build and what power plants to operate is based on the income you get from electricity customers.

Nuclear plants run about 90 percent of the hours in a year, and they operate reliably through peak periods, like the hottest summer days and the coldest winter nights. Nobody is certain how this auction is going to come out, but the experts think that prices will rise a bit, and nuclear plants will get a little more income.

Reactors don’t get paid for being carbon-free or for not producing the pollutants that lead to smog. It’s important that they at least get paid for being there when the system needs them. Reactors face challenges in this period of cheap natural gas and heavily-subsidized wind, and a stronger capacity market won’t solve those problems. But it will help a bit.

ADDENDUM: The results are in, and the auction will help reactors, but not some of the most threatened. Exelon is considering the retirement of five reactors whose profitability has been hurt by competition from low natural gas prices and subsidized wind. One such plant, Quad Cities, did not clear in the auction, meaning that it will not receive any revenue for its capacity during the period auctioned, the year that begins on June 1, 2018. If the plant is operating, though, it will earn revenue from selling energy. (Two other Exelon reactors did not clear, Oyster Creek, which is already identified for closure later in this decade, and Three Mile Island.) Exelon said the results of the auction would “begin to level the playing field.” Capacity prices varied by region, but some rose by more than a third.

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