Low prices in PJM’s capacity auction spell trouble for Exelon’s Illinois nuclear fleet

A long-delayed auction yields lower-than-expected prices in the country’s biggest capacity market. That’s bad news for struggling nuclear power plants.

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Mid-Atlantic grid operator PJM reported dramatically lower prices for its first capacity auction in three years, with little indication of a strong effect from the Trump-era regulation that many feared would restrict state-subsidized carbon-free generators from participating.

In fact, nuclear, wind and solar power — the same resources subject to the Federal Energy Regulatory Commission’s minimum offer price rule” that led to a three-year delay for the country’s biggest capacity market — increased their share of the 144,500 megawatts of capacity to supply the transmission network serving about 65 million people from Chicago to the Eastern seaboard.

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But the roster of nuclear plants that cleared the auction didn’t include the two in Illinois that utility Exelon has said it will close by year’s end unless they receive state subsidies. And other nuclear power plants struggling to remain economically competitive in PJM’s 13-state footprint could face serious trouble if capacity prices remain this low in years to come, industry analysts said.

PJM on Wednesday reported average prices of $50 per megawatt-day for 144,477 MW of capacity resources, well below the $140 per megawatt-day reached in its 2018 auction. Prices in the more congested regions of PJM are higher than that average, but still well below 2018 levels: $97.86 for its eastern region including New Jersey and eastern Pennsylvania, well below the $166 in 2018, and $68.96 for the northern Illinois region served by utility ComEd, compared to $196 in 2018.

Image credit: PJM

While the vast majority of capacity in PJM is served by natural gas power plants, the results appear to have been good for renewable energy, with 1,728 MW of wind clearing, up 312 MW from 2018, and 1,512 MW of solar clearing, up 942 MW from 2018. And while coal-fired power plants cleared 8,175 fewer megawatts than in 2018, nuclear power plants cleared an additional 4,460 MW, despite the fact that many of them do receive state subsidies subject to the minimum offer price rule.

We were expecting the MOPR to have more teeth to put an upward pressure on prices by filtering out state-subsidized resources,” George Katsigiannakis, VP of energy power markets at ICF, said in a Thursday interview.

The short and unhappy life of the MOPR rule

That filtering” of clean energy resources supported by state decarbonization policies is the reason why environmental and clean energy groups, as well as states with clean energy mandates including New Jersey, Maryland and Illinois, have fought the MOPR rule. FERC Chair Richard Glick, appointed by President Joe Biden in January, voted against the rule and has made it clear he hopes to see it replaced soon, whether through legal challenges or action by PJM and its stakeholders to craft a successor market structure.

It’s quite likely that this week’s auction could be the last to impose the MOPR on state-subsidized resources. In its latest plan to revamp its capacity market rules for next year’s auction, PJM stated it intends to presume that state policies are done in good faith” and not pursue attempts to ban state-subsidized resources from its capacity market unless instructed to do so by FERC.

Todd Snitchler, president and CEO of the Electric Power Supply Association, a power plant operator trade group, said in a Wednesday statement that this week’s auction results indicate that fears that the MOPR rule would raise prices or lead to windfall profits for fossil fuel generators appear to be unfounded.

He also warned that timely and competitive forward capacity auctions will be essential for sending the price signals necessary to maintain reliability” as more renewable energy is added to the grid.

Growing challenges for Exelon’s nuclear fleet

The strong showing for nuclear power was an odd outcome for an auction with such low prices, Katsigiannakis said. Fewer nuclear plants cleared PJM’s auction in 2018 despite much higher prices, he noted.

Capacity markets are designed to provide the missing money” that resources aren’t earning from energy markets yet need to keep operating so they can supply power when the grid needs it most. In that light, clearing an auction at lower prices equates to an economic admission that the clearing resource doesn’t need as much money to stay open, Katsigiannakis said.

But that’s certainly not the case for Exelon’s struggling nuclear plants in Illinois. Last year, the utility announced plans to close its Byron and Dresden plants by fall 2021 if it did not receive an offer from Illinois lawmakers to subsidize them.

On Wednesday, Exelon reported that the Byron and Dresden plants failed to clear PJM’s auction and still face premature retirement” later this year. It stated that its Braidwood and LaSalle nuclear plants did clear the auction, but still face retirement by 2023 due to unfavorable market rules.”

Exelon’s standing with Illinois lawmakers has been degraded by its connection to a bribery scandal that’s embroiled former Illinois House Speaker Michael Madigan and top executives of ComEd, Exelon’s Chicago-area regulated utility. The state legislature adjourned last week without reaching agreement on a clean energy bill that could include subsidies to keep the Byron and Dresden plants open.

An independent study commissioned by Illinois Gov. J.B. Pritzker’s office determined that the Byron and Dresden plants needed $350 million in subsidies over five years to keep supplying roughly 30 percent of the state’s carbon-free electricity, a key measure of their value for the state’s long-term decarbonization goals. But Exelon CEO Chris Crane has said that this isn’t enough to keep the plants running economically. 

Exelon also reported that its Quad Cities plant, which along with its Clinton plant is the recipient of $2.3 billion in subsidies over 10 years enabled by a 2016 Illinois law, also failed to clear the auction. Exelon cited the MOPR rule as the reason the Quad Cities plant did not clear the auction, while the Clinton plant is located in the territory of grid operator MISO

An uncertain future for nuclear power

Himanshu Pande, ICF director of energy power markets, noted that several nuclear power plants now receiving similar state subsidies, such as the Salem and Hope Creek plants in New Jersey, may have been able to clear PJM’s capacity market by applying for the unit-specific exemption” to the MOPR rule. This permits power plant operators to reveal data on their operating costs to seek an alternative minimum price cap than the administratively determined one that would set their minimum bid.

The results of PJM’s auction indicated there was significant underbidding by nuclear resources,” Pande said. They were willing to accept the lower price,” perhaps in anticipation of the Biden administration following through on proposals to offer subsidies to nuclear power plants to retain their zero-carbon energy.

Lower capacity prices are a good thing for the electricity customers in PJM’s 13-state territory, since they lower the portion of their bills to cover the payments to power plants to remain open in future years. The total cost for the resources cleared in PJM’s latest auction was $3.9 billion, a $4.4 billion reduction from the cost of resources cleared in its 2018 auction.

Still, we know that nuclear and coal units cannot survive with such a low price,” Pande said. Nearly 28 gigawatts of coal and nuclear capacity have retired from PJM’s system since 2018. We expect that trend is going to continue, especially on the coal front,” he said. On the nuclear front, it will come down to how much support they are given.”

(Article image courtesy of Bill Tracey) 

Jeff St. John is the editor-in-chief of Canary Media. He covers the technology, economic and regulatory issues influencing the global transition to low-carbon energy. He served as managing editor and senior grid edge editor of Greentech Media.