PJM auction results could push nuke operators to 'double down' on subsidies
Unexpectedly low prices in the May capacity auction could mark a turning point for market reform debates
Prices in the PJM Interconnection’s capacity auction were once again disappointing for many generators, but for operators of nuclear power plants they could be a particularly troubling sign.
The results could add to efforts to create nuclear subsidies and prove to be a turning point in the evolution of PJM’s market structure as they underscore the competing forces that are coming to a head in the wholesale market.
The repercussions have already affected one nuclear plant. At the end of May, Exelon said it plans to close its 857-MW Three Mile Island in Pennsylvania “on or about September 30, 2019,” and take a write-off of up to $110 million later this year.
The clearing price for the RTO as a whole in PJM’s 2020-21 capacity auction was $76.53/MW-day. The RTO clearing price in each of the last three auctions was above $100/MW-day.
There were notable exceptions to the lower prices, with some zones in the RTO breaking out with higher pricing – such as the ComEd zone, which cleared at $188.12/MW-day – but, overall, the results fell short. Market expectations were for the RTO to clear in the $90-100/MW-day range.
PJM holds an auction every year to procure capacity three years in the future. The base residual auction (BRA) is designed to provide economic incentives for owners to keep existing plants running to ensure reliability and for developers to build new plants to ensure future supplies.
But a combination of slack demand, driven in part by gains in energy efficiency, and low cost gas-fired generation made possible by cheap natural gas has changed the economics of wholesale power markets.
In PJM where gas-fired generation often sets the clearing price, older generating plants, particularly coal and nuclear plants, are struggling to remain profitable.
Capacity payments were designed as a way to provide a revenue stream for longer term investments and to offset the short term focus inherent in the day-ahead power market.
The design has worked well for new generation fired by cheap natural gas. PJM continues to attract new investment, though there are signs that that the new-build cycle may be slowing.
The 2020-21 BRA cleared 2,823 MW of new resources, comprising 2,389 MW of new generation – predominantly gas-fired combined-cycle plants -- and 434 MW of uprates. In last year’s auction, 5,373 MW of new generation cleared.
The steady influx of new generation has resulted in a reserve margin of 23.3%, the highest it has been in over a decade and 6.7% higher that PJM’s target reserve margin of 16.6%.
“It is an over supplied market,” says Paul Patterson, an analyst at Glenrock Associates, and that is not good for higher priced resources.
Beyond Three Mile Island
Three Mile Island was in fact one of two Exelon nuclear plants that did not clear the BRA. The other was Quad Cities in Illinois.
The fact that Quad Cities did not clear the auction was notable because it was one of two Exelon nukes in in Illinois – the other is the Clinton plant, which is in the Midcontinent ISO – that is a beneficiary of the Future Energy Jobs Act.
FEJA, passed by the Illinois legislature in December 2016, provides $325 million in zero emission credits (ZECs) to keep the nuclear plants running for 10 years.
It would seem that with a ZEC to back it up, a nuclear plant operator could bid into the capacity auction at a lower price to ensure that it clears, adding to its potential revenue. That, evidently, was not the thinking at Exelon.
“It was essentially a timing issue,” says Exelon spokesman Paul Adams. The Illinois ZEC does not begin until June, and Adams says Exelon did not want to get ahead of itself in preparing its bid for Quad Cities. Clinton was bid into and cleared MISO’s last capacity auction.
Adams noted that that Three Mile Island is a single reactor plant, which are generally less profitable than plants with more than one reactor that can spread costs across more electrical output. He also noted that Quad Cities could be bid into one of the incremental auctions that PJM holds in the intervening years between the BRA and the start of the delivery year.
Exelon has said that Three Mile Island has not been profitable for five years and has failed to clear the past three PJM capacity auctions.
Exelon owns three of Pennsylvania’s five nuclear plants. Two of those, Limerick and Peach Bottom, cleared the auction. The other two plants, Susquehanna and Beaver Valley, are owned by Talen Energy and FirstEnergy, respectively.
In all, seven of Exelon’s nine nuclear plants in PJM cleared the capacity auction for a total cleared capacity of 13,275 MW, of which 8,075 MW was in the high priced ComEd zone, and 4,350 MW was in EMAAC, which cleared at $187.87/MW-day, and 850 MW was in SWMAAC.
In a research note, Neel Mitra, a director and head of power and utilities research at Tudor Pickering Holt, noted that Exelon’s Three Mile Island “playbook is very similar to how it handled” its Quad Cities nuclear plant.
Exelon “priced TMI out of the past three capacity auctions before making a retirement announcement,” he said. Now, he said, the company is “forcing the state’s hand to make a decision.”
Legislation to provide subsidies for nuclear plants has not been introduced in Pennsylvania, but legislators have formed a caucus on the issue and opponents are already gearing up for a fight.
In its announcement about closing TMI, Exelon argued that nuclear power should be included in Pennsylvania’s Alternative Energy Portfolio Standard or, alternatively, the state could adopt a ZEC program similar to those being implemented in Illinois and New York.
In Ohio, FirstEnergy is taking a similar strategy. The utility company is lobbying for passage of legislation that would provide $300 million a year for 10 years under a Zero Emission Nuclear Resource mechanism — essentially a ZEC under another name.
Spokesman Douglas Colafella says 100% of all three of FirstEnergy’s nuclear plants — Beaver Valley, as well as Davis-Besse and Perry in Ohio – cleared the PJM auction.
“If we sell the plants, the capacity agreements would transfer to the new owners,” he says. “It shows they are a valuable asset.”
Colafella said the capacity prices are too low to support investments in new plants or to maintain existing plants. FirstEnergy’s nuclear plants are in the ATSI zone, which cleared at the RTO price.
In a May 31 note to investors, the company said, “FirstEnergy views these low clearing prices, coupled with low energy prices, as unsustainable to support vital coal and nuclear baseload generation in these regions. FirstEnergy continues its efforts to exit commodity-exposed competitive generation markets in order to become a fully regulated company.”
In a research report, UBS analyst Julien Dumoulin-Smith said that the low capacity prices “could exacerbate the pressure on the nuclear industry” to “double down” on their efforts to pursue some form of revenue assurance, particularly in Ohio and Pennsylvania.
Nuclear operators are not the only entities feeling pressure.
The prospects that some generators could earn revenues from out-of-market mechanisms is troubling to some stakeholders in PJM and to the RTO itself. Nuclear power supplies about one-third of PJM’s energy supplies.
At a recent Federal Energy Regulatory Commission technical conference on the health of wholesale power markets, PJM presented two papers.
One proposed a two-tiered approach to the capacity market that would remove subsidized offers from both the supply side and demand side of the auction results. A similar paper was presented by ISO-New England.
The other paper explores a possible mechanism that would advance zero emission objectives by incorporating into PJM a market for carbon dioxide allowances similar to the Regional Greenhouse Gas Initiative that operates in nine Eastern Seaboard states.
Support for a carbon pricing mechanism was a rare point of consensus during the FERC technical conference, but regulators and stakeholders did not address the PJM or ISO-NE proposals directly.
“We believe much of these reforms are focused on limiting the impact of future subsides on the capacity prices, rather than meaningfully improving the auction today,” Dumoulin-Smith wrote. And, he said, “these next few years a pivotal for the future of PJM.”
But as Patterson notes, the lower prices PJM power markets could make it harder for either side to get what they want.
One of the arguments nuclear generators have used to support subsidies is that removing nuclear capacity from the market would raise prices for consumers. But that argument is going to hold less weight if other PJM stakeholders argue that “prices have to be juiced up if the nukes are subsidized."
While market reform discussions are underway both at the eastern RTOs and FERC, the issue could play out in the courts if solutions are not quickly enacted. Both the Illinois and New York ZECs are being challenged by independent generators in their respective states.
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