The Exchanges

Q Yeah, can you run through the numbers? Where had the pricing been, and then where has it been now the past two years?

A Um, so the pricing in the early twenty-tens was maybe around a hundred dollars a megawatt day, additional sort of reforms and changes that PJM made. Depress the price even more at those high reserve margins. I think we got down as low as 30 dollars a megawatt day, barely enough to, um, to really deliver returns to, um, merchant generation in PJM. Last year's clearing price was closer to 270 dollars a megawatt day, so, you know, eight times more than it had been the last few auctions, and, and, You know, much higher than it even had been historically. Um, and, and of course, uh, this auction, which we'll get to in a minute, we've cleared even higher.

AI assessment note: “Last year's clearing price was closer to 270 dollars a megawatt day”

Q Right, ok, so then, so PJM is one of these markets, it's the, the wholesale market and the Mid-Atlantic. It's a big one as far as these wholesale markets go. Um, and they hold this capacity auction annually. Can you just kind of walk through the mechanics of like, what is the capacity auction and what is it, what's it asking for?

A So, uh, the capacity market is asking developers of generation, holders of power plants, you know, that are running today, as well as those who, who may develop new power plants in the future, you know, to, to basically bid a price for, for their capacity going forward in the future. PJM historically Had run this as a, what they would call kind of a four years forward auction, where the price signal would be for four years into the future. And this was thought to be a reliable signal in the sense of basically kind of saying, okay, if there's a good price that clears from the auction, I've got a little bit of time as a developer to bring my generation online. And in service. Not every market does it that way. PJM was somewhat unique, PJM in New England. But, you know, this was viewed as giving developers the lead time to bring new capacity to bear. So with that background, then, PJM was basically saying, what are we bid to build new capacity four years from now? If you were looking at a new gas-fired generation plant, um, you might, you know, with, with your knowledge as a developer, uh, understand what it would cost to procure the turbines, procure the engineering, get all the arrangements in place, the supply chains, fuel to bring that plant in service into the future. You might know what lending terms you can get, um, And your amortization, all of those details that basically…

AI assessment note: “the capacity market is asking developers of generation... to basically bid a price”

Q And that applies by, by the way, both to existing generation units that might retire where you can bid into the capacity market to say, what do I have to get paid to keep operating? And for developers who are building new capacity, right? And like that stuff gets mixed in together in the results.

A Absolutely. It's an important point, right? A strong enough price signal might, you know, signal, hey, there's going to be enough revenue in the future that, you You know, as an existing asset, maybe a coal plant, maybe an older gas plant, I can invest in it, keep it online, and then be a source of reliable capacity into the future. So what does PJM do? I'll try to kind of move the, move the process forward one step. Basically, they're going to take all of those bids, the sum total of those bids, maybe They go through a process of basically stack ranking those bids from lowest to highest. Look at how those highest bids compare to what they call a variable resource requirement curve. That is the demand curve that delivers different levels of procured capacity, which is kind of correlated with reliability, with a price. And so, you can think of it as a kind of a classic economics one-on-one solution. Where does that stack rank supply cross that demand curve? And that is the price that they report out that will procure that level of capacity. At least that's what they hope.

AI assessment note: “Absolutely. It's an important point, right? A strong enough price signal might”

Q retail as well. So I kind of want to cover each of those individually on the first one. For you, I guess in the context of PJM, and then maybe you can broaden this out to what we're seeing in other capacity markets, is this a red flag, or at least a yellow flag, with regard to resource adequacy, or do you think it's sort of overblown as a concern?

A It's a really interesting question. I think you would have to call it a red flag, you know, from the perspective of the need for new generation and the potential cost of the generation. I always take a step back You know, when we talk about resource adequacy, you know, uh, it often gets portrayed in the media as risk of blackouts and grid failures and things like that, right? And we just want to be really careful. Um, you know, this is an economic event. Uh, that said, it's a significant economic event, right? Customers in Ohio and Pennsylvania and Maryland, they're getting these notices. Their bills are going up by 20 or 30 bucks a month, you know. Starting this year, as a result of last year's capacity auction price, this capacity auction that, that was announced last week, uh, was a good 20% higher in round numbers, and so, um, that doesn't pretend the bill's going anywhere, but even higher. Um, and so, you know, where the price was a signal to developers, now it's become a very salient signal for consumers, and, uh, And it's getting the, the, the kind of attention, um, now that it's flowing through the bills. I did want to kind of come back to the, the, the point you made and sort of where we started, right? You know, PJM's auctions originally were for a, a four-year advance period. Now they've become compressed down to a, a, you know, season ahead, one year ahead in effect…

AI assessment note: “I think you would have to call it a red flag”

Q What about the other resource that can be deployed quickly, even more quickly than solar wind storage, and I know does qualify, or at least can qualify, For S-capacity and PJM is demand response, load side resources. How has that looked in these auctions the past couple of years? How much is it scaling? What are we seeing there?

A It's an important contribution. I think that, uh, there have been some auctions where, um, we've seen more demand response than you would expect given kind of where prices settled. Along with, uh, All the other resources that PJM has considered and kind of said, okay, if you bring a hundred megawatts of gas generation, we count that as about 70 megawatts of reserve contribution. Um, if you bring a hundred megawatts of solar, we may count that as eight to 10 megawatts of reserve contribution. You know, very, very conservative, maybe appropriate, Given the needs of resource adequacy, demand response is assessed a little bit similar to gas. Maybe between 60 and 70% of the megawatts they say they'll bring, PJM, you know, assesses you'll bring. If you bring a hundred megawatts demand response, PJM says, great, we'll count that as about 60. Under those rules, demand response kind of needs to evolve so that it can contribute more. Um, it brought about a gigawatt To the 2024 auction, and I think a lot of stakeholders felt with a stronger price signal in place, we'd see even more demand response. We actually saw a little bit less in this auction, and I think it points to the need for the industry to kind of evolve and adapt to the rules that PJM has kind of created for their participation.

AI assessment note: “It brought about a gigawatt To the 2024 auction... We actually saw a little bit less”

Q Okay, so let's broaden it out from PJM for a second. Like, to what extent is this phenomenon that we are seeing in PJM specific to PJM versus happening all across the country? Is this a regional dynamic or a national one or somewhere in between?

A Um, it's, uh, it, it, it, I think it is sufficiently widespread that you call it a national, a national dynamic. Um, you know, all of the, uh, grid managers, independent system operators, PJM has the biggest footprint, as we described earlier. Um, but, uh, New York ISO, New England ISO, um, California, Texas, all the major ISOs, Midwest, Midwest ISO, um, Have all, you know, done a sort of a rigorous reevaluation of the reliability contributions of wind and solar, for instance. They've taken their best guess at battery storage, and battery storage is more complicated. It's a relatively new segment. They're trying to understand that the technology is changing pretty rapidly. You've got Different durations of battery storage to consider, um, so I'm less confident that they've necessarily gotten it right, um, and that's part of the issue is that all of their assessments of reliability contributions of these different resources are kind of moving targets. Given the importance of the capacity revenue stream from the developer perspective, it creates a little more uncertainty than maybe you would like to see, but PJM has one of the older Um, I should say more longer duration capacity auction markets. It goes back further. So in some ways, it's, it's, it's sort of on the vanguard of making these changes, but every ISO has basically done two things that are noteworthy. You know, one is,…

AI assessment note: “I think it is sufficiently widespread that you call it a national, a national dynamic.”

Q we're watching what's happening as the market reacts to all this load growth and then all the other dynamics that are at play in the electricity market, retiring existing generation, et cetera. Um, so let's get briefly right to the heart of it. Why are we talking about the PJM capacity market here? Like, what is it that happened in the past two years That makes it worthy of note.

A It's a, it's a confluence of events, uh, just, just as you've described. We had a long period where the capacity prices were stable and pretty low. Um, reserve margins were perceived to be high in PJM, and so when they're high, you don't need a lot of new capacity, and at least in principle, that low price should be a signal that, okay, you don't need to bring A lot of new capacity to market. Um, PJM became concerned. Other stakeholders became concerned that, uh, those capacity prices maybe were too low and were disincentivizing investment and maybe incentivizing developers to pull capacity off the market to retire generation more quickly than is really appropriate from a reliability standpoint. This happens at the same time as, as you mentioned, uh, demand, uh, especially for data centers, um, but other, other types of load within PJM as well. Think about electrification. Think about electric vehicles. Um, but data centers are certainly the lead story. Um, you know, at the same time as PJM sort of like, well, we're a little concerned about the investment side of the equation. Wow.

AI assessment note: “It's a, it's a confluence of events, uh, just, just as you've described.”