PJM: Producer - Pay to Play

 

PJM adopts the common practice of new power producers paying for the grid upgrade required to support the new load being introduced by the producer. This ensures fairness as a principle and avoids free-riding. 

A similar model exists for most markets including MISO, ISO-NE, SPP, ERCOT, NYISO, although with e.g. ERCOT, broader upgrades beyond the interconnection can be shared with the transmission operator funded through transmission rates.

However: In PJM, MISO, ISO-NE and SPP, transmission owners also have the unilateral ability to fund upgrades and charge the interconnection owner for the cost plus a return. There are concerns by FERC that this increases the cost for end consumers because the transmission owners is earning a return for the upgrade vs. this being paid for by the generator - although still to be reconciled that funding of capex should in general earn a return to attract capital, regardless of the source of that capital. The transmission owners should therefore have the right to compete to fund upgrades. But should this be at the transmission owner or the producer’s discretion?

Another concern is around cost allocation - how much of the burden is funded by the producer, and balancing that against burdening the rate base to be shouldered by consumers who may not ultimately benefit from the upgrade.

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Anatomy of an Auction: A Simplified Example of PJM Capacity Auction Clearing

PJM Service Area (inc. DC)

Anatomy of an Auction: A Simplified Example of PJM Capacity Auction Clearing

The PJM annual capacity auction utilizes a "descending clock" mechanism to determine which power generators will be paid to be on standby and ensure a reliable electricity supply for the 65 million people in its territory. While the actual auction is highly complex, this simplified example illustrates the core principle of how the auction "clears" and sets a uniform price for all successful participants.

The Setup: Demand and Supply

First, PJM determines the total amount of capacity it needs to secure for a future year. This is based on forecasted peak demand plus a reserve margin for unexpected events.

Let's assume for our example:

• PJM's Required Capacity: 10,000 Megawatts (MW)

Next, power plant owners offer their available capacity into the auction at the minimum price they are willing to accept to be available for that year. These offers come from a variety of sources with different costs.

Here are our hypothetical power plants and their offers, ranked from lowest to highest price:

Power Plant	Resource Type	Capacity Offered (MW)	Offer Price ($/MW-day)	Cumulative Capacity (MW)
Plant A	Nuclear	2,000	$10	2,000
Plant B	Hydroelectric	1,000	$25	3,000
Plant C	Coal	3,000	$50	6,000
Plant D	Natural Gas (Combined Cycle)	2,500	$90	8,500
Plant E	Natural Gas (Peaker)	2,000	$150	10,500
Plant F	Older Coal	1,500	$175	12,000
Plant G	Demand Response	500	$200	12,500

The Descending Clock in Action

The auctioneer starts the "clock" at a high price, well above what anyone has offered. At this high price, all the power plants are considered "in" the auction because the price is favorable to all of them.

The auctioneer then systematically lowers the price in rounds. As the price on the clock drops, it will eventually fall below the offer price of some of the more expensive power plants. When this happens, those plants will drop out of the auction as the price is no longer acceptable to them.

Let's simulate the process:

• Clock Price: $250/MW-day: All plants (A through G) are "in." The total available capacity is 12,500 MW, which is more than the 10,000 MW needed.

• Clock Price: $180/MW-day: The price is still above Plant F's offer, so it remains in. All plants from A to F are still in.

• Clock Price: $160/MW-day: The clock has now dropped below Plant F's offer of $175/MW-day. Plant F drops out. The total available capacity is now the sum of Plants A, B, C, D, and E, which is 10,500 MW. This is still above the 10,000 MW requirement.

• Clock Price: $150/MW-day: At this price, Plant E, with its offer of $150/MW-day, is still "in." The total available capacity from Plants A through E is 10,500 MW.

The Clearing Price: Where Supply Meets Demand

The auction "clears" at the price where the amount of offered capacity is just enough to meet PJM's required capacity.

In our example, when the price dropped and Plant F exited, there was still 10,500 MW of capacity available from the remaining plants (A, B, C, D, and E). Since this is the first point at which the available capacity meets or just exceeds the 10,000 MW requirement, the auction is over.

The clearing price is set by the offer of the last generator needed to meet the demand. In this case, that is Plant E, the natural gas peaker plant. Therefore, the clearing price for all successful participants is $150/MW-day.

The Results: Who Gets Paid and How Much

Here's the final outcome of our simplified auction:

• Cleared Generators: Plants A, B, C, D, and E.

• Uncleared Generators: Plants F and G did not clear because their offer prices were too high. They will not receive a capacity payment.

• The Payment: All the cleared generators (A through E) will receive the same clearing price of $150/MW-day for their committed capacity for the specified delivery year. This is a key feature of the auction – even though Plant A offered its capacity at a much lower price, it still receives the higher, market-clearing price.

This example demonstrates how the PJM capacity auction is designed to secure the necessary amount of power at the most competitive price, with the final clearing price being set by the last resource needed to ensure grid reliability.

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US Power Markets

 

US Power Markets

PJM Service Area (inc. DC)

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