August 8, 2024

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This is your first of 2 complimentary RTO Insider articles this month.

PJM Market Participants React to Spike in

Capacity Prices

(//www.rtoinsider.com/84751-pjm-market-participants-react-to-spike-in-capacity-prices/)
PJM CEO Manu Asthana | © RTO Insider LLC

Aug 5, 2024 | Devin Leith-Yessian (//www.rtoinsider.com/author/devin-leith-yessian/)

Generation owners point to the nearly 10-fold increase in capacity prices seen in the 2025/26
Base Residual Auction (BRA) results announced July 30 as the price signal they need to invest
in new development. Meanwhile, consumer advocates say they worry a compressed auction
 schedule and backlogged interconnection queue will limit the ability for market participants to
react.
August 8, 2024

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The clearing price for most of theOut
Log RTO(#/)jumped toMy
$269.92/MW-day and two regions surged to
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their price caps, reaching $466.35/MW-day in the Baltimore Gas and Electric (BGE) zone and
$444.26/MW-day in the Dominion zone. The “rest-of-RTO” price in the previous auction was
$28.92/MW-day. (See related story, PJM Capacity Prices Spike 10-fold in 2025/26 Auction
(https://www.rtoinsider.com/84356-pjm-capacity-prices-spike-2025-26-auction/).)

PJM (https://www.rtoinsider.com/category/rto/rto-pjm/) said the increase was driven by

tightening supply as generation resources retire, increased demand as data center load is
expected to come online and a shift in how PJM forecasts reliability risks and determines the
capacity contribution for resources.

Nearly half of the capacity that cleared the auction was supplied by gas generation, at 48%,
followed by 21% nuclear and 18% coal. Demand response made up 5% of cleared capacity.
Hydro fell to 4% and wind and solar were at 1%.

“The significantly higher prices in this auction confirm our concerns that the supply/demand
balance is tightening across the RTO. The market is sending a price signal that should incent
investment in resources,” PJM CEO Manu Asthana said in a July 30 announcement
(https://www.pjm.com/-/media/about-pjm/newsroom/2024-releases/20240730-pjm-capacity-
auction-procures-sufficient-resources-to-meet-rto-reliability-requirement.ashx) of the BRA
results.

Consumer Advocates, Enviros: Sluggish Planning

and Market Design
Illinois Citizens Utility Board Executive Director Sarah Moskowitz said PJM has been slow to
adapt and failed to design a capacity market that sparks new generation investments without
creating a windfall for developers.

“The power grid operator’s compressed auction schedules mean generators can’t build and
come online quickly enough to respond to prices and bring down costs. Just as concerning,
PJM has dragged its feet on interconnection and long-term transmission policy reforms that
could speed up its approval process and bring needed clean, affordable energy online more
quickly. Similarly, we have concerns about the accuracy of PJM’s load forecasting, as detailed
in a recent letter (https://www.pjm.com/-/media/about-pjm/who-we-are/public-
disclosures/2024/20240718-med-opc-letter-to-pjm-board.ashx) from consumer advocates to
PJM,” she said.
 Susan Bruce, representing the PJM Industrial Customers Coalition (ICC), said the auction
results differ significantly from simulated results PJM presented in the stakeholder process and
August 8, 2024
it remains unclear what led to that gap.
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“Regardless, the auction results will have a serious impact on customers. Given the timing of
the auction relative to the 2025/2026 delivery year, customers have little to no opportunity to
take action to minimize the cost consequences. And with delays in the interconnection queue,
there is real concern about what may happen in the next auction,” she said. “Focused and
dedicated efforts must be undertaken — post haste — to ensure that PJM market design can
both facilitate new entry and retention of resources, without market power being exercised,
better accommodate single point load integration, and properly reflect the value of non-weather
sensitive customers’ demand response capability.”

Tom Rutigliano, of the Natural Resources Defense Council, said the price jump is the result of a
reliance on fossil fuel generation at the expense of designing a market and grid set up to
facilitate the development of clean energy. Gas-fired resources in particular, he said, have failed
to live up to the promise of delivering reliability at low cost.

“Make no mistake: This was foreseeable and preventable. This is what happens when
regulators sideline a wealth of historically affordable clean energy resources waiting at their
doorstep and the transmission needed to bring them online. For years, the largest grid operator
in the eastern U.S. has all but refused to diversify its resource mix and bring new energy online,
and instead opted to depend excessively on an aging fossil fuel fleet while ignoring its reliability
failures. This sticker shock is a direct result of recent regulatory changes made to address
those reliability failures.”

He argued the cure to high capacity costs lies in the renewable energy projects pending in
PJM’s interconnection queue.

“Diverse power grids are critical for reliability, and now we see just how critical they are for
affordability. With wind and solar only making up an abysmal 2% of resources in this auction,
but the overwhelming majority of PJM’s project queue, it is clearer than ever that PJM needs to
rapidly scale up new energy resources to protect customers and resilience,” he said. “The cost
of PJM’s interconnection delays has now reached billions of dollars. Leaders in PJM states
must demand accountability and solutions from their grid operator before they have to pay
billions more in the next auction just five months from now.”

PJM spokesperson Dan Lockwood said the RTO is in the process of implementing a FERC-
approved reworking in how it conducts generation interconnection studies, which uses a
cluster-based approach to determining any necessary network upgrades and allocating costs.
He said that approach is expected to process 72 GW of resources in 2024 and 2025.
 “Today, about 38,000 MW of resources that have already cleared PJM’s interconnection
process have not been built due to external challenges that have nothing to do with PJM,
August 8, 2024
including financing, supply chain and siting/permitting issues. PJM remains concerned with this
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(#)
slow pace of new generationLog
construction
Out (#/) and isMy
considering ways to accelerate those who can
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successfully overcome those challenges and build,” Lockwood said.

Transmission Owners See Regulated Generation as

Solution
During the utility’s July 31 earnings call, FirstEnergy CEO Brian Tierney said the high capacity
prices and sluggish resource development suggest state administered capacity procurements
may have a part to play in augmenting PJM’s marketplace, pointing to those run by the New
York State Energy Research and Development Authority (NYSERDA) and New York Power
Authority (NYPA).

The utility has limited ability to own capacity assets in many states. However, conversations
about permitting it to develop dispatchable generation with a regulated return could allow it to
respond to price signals when other market participants are not. In states where FirstEnergy
does own generation, like West Virginia, he said that could take the shape of new combined
cycle gas resources, while in Pennsylvania, that would take legislative changes.

“There are people that get upset and say, ‘You’re going back to regulation.’ I don’t think you
have to go back to regulation. I think you can still have energy markets. I think you can still have
retail choice where you have it today. But I also think you could have constructs like NYSERDA
or NYPA where they could buy on behalf of the state’s residents. And that doesn’t have to be an
end to competition,” Tierney said. “And they can even have auctions where all people could
participate in that: utilities, independent power producers and others. So, for the people that say
it has to be one or the other, I just don’t think that’s a valid premise.”

Part of the difficulty Tierney outlined is the disparity between the amount of time it takes to plan
and develop new generation resources, compared to how quickly new loads can come onto the
grid. He said new resources built in response to the higher prices could take as long as six
years to come online, falling toward the end of the period PJM said it’s concerned about
resource adequacy in a February 2023 white paper
(https://www.pjm.com/-/media/library/reports-notices/special-reports/2023/energy-transition-in-
pjm-resource-retirements-replacements-and-risks.ashx). (See “PJM White Paper Expounds
Reliability Concerns,” PJM Board Initiates Fast-track Process to Address Reliability
(https://www.rtoinsider.com/31718-pjm-board-initiates-fast-track-process-address-reliability/).)

While he said new resources with a regulated return could be part of the solution, Tierney said
developing new competitive generation is off the table.
 “The thing we wouldn’t be willing to do would be start competitive generation of our own. That’s
something that we’ve recently come out of. We paid a heavy price for that. We’ve rebuilt our
August 8, 2024
balance sheet in the wake of that, and that’s not a place that we’re going to be going back to.
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But other things, other opportunities
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(#/) could benefit our customers
My Account have the capacity that
(//www.rtoinsider.com/local-my-account/)
they need be responsive from a price standpoint are all things that are on the table and are all
things we’re talking to our states about,” he said.

PJM capacity prices increased nearly tenfold in the 2025/26 Base Residual Auction, with two regions reaching their zonal caps. | PJM

In a statement, Exelon said the results show a need for new generation and transmission
assets, particularly within the constrained BGE zone. In its announcement of the auction
results, PJM said the higher zonal prices for BGE and Dominion were the result of insufficient
generation within the zones and limited transmission to import from other regions.

“The recent PJM auction results underscore a critical need for strategic investments within the
Exelon footprint, particularly in our BGE service territory in Maryland. The elevated price levels
in this area, as well as others, reflect both a scarcity of resources and transmission constraints.
Even with Exelon’s ongoing investments, including $34.5 billion over the next few years to
upgrade the energy grid, additional transmission projects are still needed to ensure the strength
and reliability of the energy grid now and in the foreseeable future,” the utility said.

During Exelon’s Aug. 1 earnings call, CEO Calvin Butler said all options are being pursued in
response to a question asking whether the utility is looking at authorization for including peaker
generation in rates.

“We’re working with our commissions on all types of scenarios. We shouldn’t take anything off
the table because we need to address this issue and ensure affordability and equity [are] at the
forefront of all discussions,” he said.

Generators Say Auction Delivers Needed

Investment Signal
Enel North America Head of Energy and Commodity Management Roberto Rosner said the
auction tells generation developers that now is the time to build new capacity resources.
 “The signal from the auction is unmistakable: PJM needs more clean generation and more
flexible demand-side resources. Power producers like Enel are eager for PJM to implement its
August 8, 2024
interconnection reform so we can add more clean, affordable megawatts to the grid. As load
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Log Out data centerMybuildout,
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maintaining reliability has never been clearer. It’s also clear that the substantial derate of
capacity through ELCC ratings had a meaningful impact on the outcome.”

Voltus President Matthew Plante said the results were predictable given the number of
generation retirements and PJM’s load forecasts. However, shifts in resource accreditation also
had a large impact on the amount of supply able to offer into the auction. PJM’s shift to
marginal effective load carrying capability (ELCC) and reworked risk modeling led to the focus
on when resources can perform shifting from summer to winter.

“As the grid changes, we’re no longer in a situation where peaks are always during the summer
months. In fact, the last time PJM dispatched the emergency load reduction program was
December 2022 … so now it’s equally likely that PJM will need these resources in the winter
than in the summer,” he said.

For demand response, that led to a 25% derate in the capacity resources could offer, reducing
DR supply by about 3,000 MW. Nonetheless, Plante said the high price point is likely to turn
around a yearslong decline in DR participation in PJM’s capacity market. Asset-backed DR
resources — such as smart thermostats, batteries or anything requiring a capital investment —
are especially likely to be buoyed by the high prices.

“It’s hard to find a customer that doesn’t want to take advantage of the value proposition that
now exists,” he said.

Technological barriers have limited DR participation in the past, but most of those have been
alleviated in recent years, Plante said. PJM and DR providers are working on addressing
remaining regulatory barriers. He called the ELCC derate a “sledgehammer solution” and said
the whiplash of frequent rule changes could affect market participation.

“I think regulators need to understand that there’s sometimes we change the rules too
frequently and are reactive to things, and yes, a whiplash on rules in particular leads to volatility
in the number of megawatts enrolled,” he said.
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PJM Appoints Vickie VanZandt to Board

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