The Regional Transmission Organization (RTO) named PJM released their first Capacity rate auction results in nearly two years on July 30th and it was a shocker. The announcement was that the PJM capacity auction rate for the June 1, 2025 – May 31, 2026 PJM year will be 269.92/MWD up from the current $29.82/MWD or 833%. For a large portion of manufacturers, schools, municipal communities, restaurants, grocery stores, etc. the increase in cost beginning June 2025 will be impactful to their monthly electric spend and bottom line. The first questions from consumers are:
1. Are we affected?
2. How much will this impact our electric spend?
3. Why did the capacity cost rise so much?
4. Was it expected to go up this much?
5. Is there anything we can do to help offset or lower the higher cost?
What is driving the PJM capacity price increase? Get rid of the underscore line past the ?
- Due to power plant retirements or pending retirements of 6600 MW there was less power assets offering electric into the PJM auction
- Due to added electric load the projected peak delivery volume went up from the last PJM auction to 153,883 MW from 150,640 MW
- After years of negotiations FERC approved market reforms to more accurately value each generation resource for delivery reliability obviously focused on renewable generation sources and their availability during peak usage events
The underlying issue whose attention has been on our radar for some time is centered around the dependable fossil fuel generation in decline. Renewable generation assets, while growing, are less delivery dependable, and when combined with growing electric usage on the grid, not only next year, but over the next several years it causes concern for supply vs demand. It’s not a secret that Intel is building a numbers of microchip plants in Central Ohio with dozens of supporting businesses locating nearby. It has also been announced that Amazon, Microsoft and Google are all adding data centers in Central Ohio. Central Ohio is not the only place in the state of Ohio or in the Midwest, northeast and East coast adding high electric consuming data centers ( all a part of the PJM grid). These businesses add to the exponential energy usage growth the grid is anticipating. PJM hopes that the extremely high capacity auction rate will stimulate the desire for new fossil fuel generations assets to quickly get on the drawing boards and built. Prior to the PJM announcement of the final capacity auction rate of $269.92/MWD for the June 1, 2025 – May 31, 2026 PJM year, it seemed the general feeling was that the final auction rate would come in around $80/MWD – $100/MWD with the highest possibility of around 120/MWD. Obviously everyone was shocked when the $269.92/MWD price was announced. PJM is working to get caught up from being two years behind holding PJM capacity auctions with the next one planned in mid-December 2024 for the June 2026 – May 31, 2027 PJM year. Will the next PJM auction results be about the same, rise even more or fall? If PJM’s methodology is proven correct, than why would it drop?
What kind of financial impact are we expected to see for consumers?
We crunched some numbers.
Example 1:
A manufacturer or school system with a 3000 kW PLC volume the year over year cost increase would be $262,800 or about $.03/kwh. If through Peak Load Management efforts the PLC volume could be reduced to 1350 kwh, the additional spend would drop next year to approximately $118,300.
Example 2:
A smaller business with a PLC volume of 300 KW would pay approximately an extra $26,000 the next PJM year versus the current PJM year.
So, what can businesses, schools, municipal communities, etc. do to minimize the impact of this pending and impactful PJM auction rate increase beginning June 2025? First, stay informed about the energy wholesale commodity markets and try to buy when the market is trading down. As an energy decision maker you must recognize the electric and natural gas prices trends up and down as fundamental market forces and speculative traders drive prices up and down often contrary to what is expected. We are one of the best in tracking and communicating energy data and price trends to clients so, if you have questions, please feel free to give us a call or email us. Second, medium to large electric consumers can often participate in Peak Load Management and Demand Response. Peak Load Management helps shave down and reduce PJM PLC KW volumes by getting a heads up the morning of when the 5 peak hours of summer usage is forecasted to happen so you can voluntarily reduce your consumption volumes during those hours. If the result is fewer PLC KW volumes billed, there will be fewer dollars billed. We are happy to explain how it works in more detail if your business is interested. Demand Response is a PJM program where large consumers can reduce their electric usage during critical peak hours or in the absence of an actual critical event a two hour PJM power reduction test, the business can actually earn income based on their reduction ability. Again, we are very well versed in this value added product and can explain the process and benefits of both Peak Load Management and Demand Response.
We can’t really finish our newsletter without giving our readers a sense of where electric and natural gas commodity prices are trending. First, natural gas prices have been trading down the entire month of July. This is mostly driven by the large natural gas storage surplus left over from last winter being extremely warm, ample natural gas daily production keeping daily cash prices soft along with speculative “short sellers” helping drive natural gas prices down as much as they can. The wholesale natural gas market seems to be in a “show me” place where they are saying, “show me daily natural gas production is being reduced”, “show me LNG exports are going to stay strong near maximum levels”, “show me that the extreme hot temperatures that are forecasted are going to actually show up”, and “show me a cold winter that ends the string of well above the normal temperature winters”.
Electric wholesale prices are being pushed and pulled by natural gas prices, electric asset owners unwilling to sell their electric cheap, and more. Some days we see wholesale electric prices drop some as natural gas prices fall while other days we see electric prices jump up with higher electric usage happening around the country. These are really strange and difficult days for the energy consumer and energy buyer. At RD Energy we want to make this volatile and data driven energy market more manageable for our clients. We know the road ahead the next few years is going to be more difficult than normal, but we will give it our best to help keep the ship on a clear and steady course.