The big news story this summer in PJM has been the auction that set the price for capacity for the period of June 2022 through May 2023. This is newsworthy because there has not been a PJM capacity auction in three years. The delay had been caused by disagreements between the Federal Energy Regulatory Commission (FERC) and PJM, which were at odds over the mechanism by which the price for capacity is set. This three-year delay created uncertainty in how capacity was valued in any forward electricity contract. And like any other security or commodity, uncertainty creates risk premiums and higher costs. Before examining the details of the most recent auction results, it is important to review capacity and why it is important to electricity buyers.

Next week, the City of Chicago will evaluate Request for Information (RFI) submissions from parties interested in taking over the city’s electricity grid from ComEd. While at some level, this may seem impractical, the intent behind the RFI is to solicit new ideas for managing energy in the nation’s third-largest city in a way that is equitable, affordable, reliable, and promotes the city’s sustainability objectives. Chicago seeks to create a resilient and clean energy metropolis for the 21st century by upgrading its electricity delivery franchise authority. In accordance with state laws and the city’s municipal codes, the city requires a franchise to deliver electricity to its residential and commercial customers.

In the PJM power market, June 1 officially marks the beginning of the 2021/2022 delivery year. This is an important date for clients that will participate in PJM’s various demand response (DR) programs and those who are actively managing capacity tags through peak shaving. DR participation and capacity tag management allow clients to realize an additional revenue stream for their business while reducing their electricity expenses at the same time.

It has been three years since PJM held its last capacity auction. That last auction, which was held in May 2018, established capacity prices for the May 2021 to May 2022 delivery year. Over the last couple of years, there has been a great deal of uncertainty in how capacity prices would be valued beyond May 2022. Before getting into details of the upcoming capacity auction, we should review what capacity is and why it matters.

PJM kept its cool last week as power markets in the midcontinent were struggling under the strain of record-setting energy demand due to a historic cold spell. Unlike what happened in Texas, grid reliability was maintained, and spot electricity prices remained under control. In PJM, the electricity futures market continues to trade sideways and largely rangebound between $26-30/MWh in the wholesale market across the entire region. Clearly, it will take more than wild weather to materially move this market.

On January 8^th, the New Jersey Board of Public Utilities (NJBPU) approved a new program that will allow PSE&G to spend $780M over the next four years to install smart meters in homes and businesses throughout its territory. This move is intended to create a more integrated network between customers and the electricity grid that will provide more transparency to price signals and ultimately help homeowners and businesses to make more informed energy decisions. These upgraded and improved meters will also provide near real-time outage detection and help customers to be more aware of their energy consumption.

Santa has arrived a few days early for electricity buyers in PJM because falling natural gas prices have had a parallel effect on electricity prices for calendar year 2021. Usually, natural gas is withdrawn from storage during the month of November as the weather cools and heating demand increases. However, there was a net increase in the amount of gas placed into storage due to the mild temperatures throughout the northeast over the last several weeks. This caused natural gas prices to fall significantly and as reported last month, this is a big deal. This gas market correction has put downward pressure on near-term electricity prices across PJM and created excellent purchasing opportunities.

Ohio House Bill 6 (HB6), signed into law in July 2019, provided a bailout for two nuclear plants and two coal plants while lowering Ohio’s renewable energy and energy efficiency goals substantially. At the time of its passage, the legislation was treated to a negative reception from the press and the bill faced scrutiny from environmental groups. Following the arrest of former Ohio House Speaker Larry Householder, a fierce advocate for HB6, on racketeering charges, Ohio lawmakers are debating whether to repeal the law, and how.

Over the last 4 weeks wholesale electricity futures in PJM have continued to rally. Fueled by bullish near-term natural gas prices, electricity prices have been highly correlated to NYMEX futures. Figure 1 shows that prices in PJM East across all calendar years significantly increased from March through May as the COVID pandemic began to spread. The market fell just as quickly through June and has slowly rallied over the last four months. Since late September prices across all calendar years have risen between 2% and 5% with the biggest increases in calendar year 2021 (blue line) and 2022 (black line). While Figure 1 is specific to eastern PJM, similar trends have been observed in the western parts of PJM.

In many electricity markets, natural gas is often the marginal fuel. This means that gas is the fuel that is used to generate the next additional amount of electricity that is required to ensure that there is enough electricity supply to meet the grid’s demand. Over the last ten years, the amount of natural gas generation in PJM has increased from 25% to nearly 40% of the fuel mix. It should be no surprise that the rise and fall of electricity prices throughout PJM is highly correlated to natural gas price movements.