PJM auction results could push nuke operators to ‘double down’ on subsidies
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.