The Federal Energy Regulatory Commission on Monday approved the PJM Interconnection’s proposal to set a price cap and price floor for its next two capacity auctions, despite opposition from the grid operator’s market monitor, LS Power and others.
“The current market conditions in PJM support PJM’s proposal to establish a time-limited ‘collar’ on the capacity market price for two delivery years,” FERC said in a 4-0 decision. FERC Commissioner Lindsay See didn’t participate in the decision.
The proposal to set a roughly $325/MW-day price cap and $175/MW-day floor for its 2026/27 and 2027/28 delivery year base capacity auctions grew out of settlement discussions with Pennsylvania Gov. Josh Shapiro, D, who filed a complaint at FERC in December seeking to lower the auction’s price cap. Without the collar, the price cap for the next capacity auction, set to be held in July, would have been about $500/MW-day and the floor would have been zero dollars, according to FERC’s decision.
Shapiro, like other governors, lawmakers and consumer advocates in PJM’s Mid-Atlantic and Midwest states, are concerned about electric bill increases set to take effect June 1. The pending bill increases — in the 20% range for some utilities — are driven by PJM’s last capacity auction, which cleared at nearly $270/MW-day for most of the grid operator’s footprint, up from almost $29/MW-day in the previous auction.
PJM contends the capacity price collar responds to converging trends, including rapid load growth, power plant retirements, state and federal policies that affect the economics of its resource fleet and the slow buildout of new generation.
Also, PJM normally holds an auction every year to buy capacity three years in advance. But because of previous auction delays, PJM has compressed its auction schedule, which limits the immediate effect of price signals because investors don’t have enough time to develop new resources between the auction and the start of the delivery year.
FERC said the price collar proposal represents a “balanced approach” that addresses those factors by improving short-term cost certainty for electricity consumers and revenue certainty for capacity resource owners.
In the meantime, PJM plans to revise key inputs into its capacity price setting process later this year and implement interconnection queue process reforms, FERC said.
FERC dismissed arguments that price collar will harm long-term investment in PJM’s power fleet by raising concerns that high capacity prices will trigger market interventions that lower the prices.
The agency said it was unpersuaded by arguments that the price cap is too low and will cause resources to exit the interconnection queue, retire, increasingly seek reliability must-run arrangements, or leave the PJM market entirely.
Given PJM’s tight supply-demand conditions, FERC also rejected concerns that the price floor could lead to capacity purchases that are unnecessarily expensive or offer little reliability benefit.
“PJM has demonstrated that capacity shortage or near shortage conditions are likely to persist for the next two delivery years,” FERC said. “We find that the benefits of PJM’s proposed temporary price floor outweigh the potential risk of over-procurement.”
PJM’s price collar proposal is the last of five capacity market-related changes FERC has recently approved, including a fast-track interconnection process for power supplies that meet certain criteria and counting reliability must-run units in the auction, ClearView Energy Partners noted Tuesday.
“We expect these authorized reforms in the aggregate to reduce capacity market prices relative to the last auction, but perhaps not to levels that alleviate political pressure from PJM member states,” the research firm said.
