Natural Gas Prices – Rising

PJM Capacity Price Forecast

The PJM Interconnection capacity auction parameters released late on Friday show a likely increase in new gas capacity clearing, increased demand response and a weak demand outlook, all of which could lead to lower capacity prices for delivery year 2016/2017, according to market analysts.

PJM’s annual capacity auction for delivery year 2016/2017 will not take place until May, but the auction parameters PJM posted last week are already giving analysts hints on how the results could turn out.

UBS Investment Research said in a Monday report that it predicts the regional transmission organization price will clear at $124/MW-day, down from $136/MW-day last year, with the MAAC zone clearing at $157/MW-day, down from $167.50/MW-day last year.

Barclays also predicted that this year’s capacity auction results will be “somewhat lower” than last year’s auction but it pegged the prices higher than UBS did, with the RTO price expected to be between $100 and $120/MW-day and the MAAC zone clearing between $130 and $150/MW-day, according to Barclays’ Monday report. Barclays also gave a prediction for the PS North Zone, between $160 and $180/MW-day.

Before each capacity auction, PJM calculates each zone’s capacity emergency transfer limit and its capacity emergency transfer objective and publishes that information in the auction parameters. Any zone that has a CETL less than 1.15 times its CETO is modeled as a zone in the upcoming auction, and the ratio level helps predict the potential for constraints within the zone.  CETL is defines as the Capacity Emergency Transfer Objective and  CETL is defined as the Capacity Emergency Transfer Limit.   An electricity broker adviser such as Better Cost Control can benefit larger customer in taking this information into account when procuring electricity.

Both the ATSI and Cleveland zones were projected at about a 140% CETL/CETO ratio, suggesting they will not clear separately, said Julien Dumoulin-Smith, analyst for UBS, in his Monday report. Meanwhile, the PS and PS-North zones were projected at 102% and 120%, respectively, suggesting those zones will clear at a higher level than the RTO-wide price, he said.

The update cemented UBS’ view that prices will show a “modest downward trajectory” in this year’s auction, Dumoulin-Smith said. Recent changes to Environmental Protection Agency demand response rules and potentialnatural gas capacity exemptions from the Minimum Offer Price Rule could play a part in capacity prices decreasing.

“Updated MOPR prices from PJM confirm a modest jump is necessary to make new gas capacity economic, however all new capacity is likely exempted from MOPR,”Dumoulin-Smith said. “Despite potential changes to demand response bidding rules, we see the EPA recent decision to allow the use of backup diesel generators as limited DR as driving another large increase in DR.”

Barclays also cited the EPA backup diesel generator rule, saying it “did not hurt the prospects for demand response.”

PJM is looking at largely flat demand growth, year-on-year. The footprint-wide peak forecast load for 2015/2016 was 163,168 MW, compared the forecast load for 2016/2017 of about 165,425 MW, up slightly more than 1%.

Furthermore, the slight increase in the load forecast isn’t due to a true rise in demand. The East Kentucky Power Cooperative will integrate its system into PJM in June, resulting in its inclusion as the EKPC zone in the upcoming auction. The addition of the EKPC zone added a peak load contribution of 2,213 MW to the footprint-wide forecast peak load for the 2016/2017 delivery year, according to the parameters.

“The parameters supported the weak demand fundamentals for power in the Mid-Atlantic and Midwest,” Barclays’ report said.

The weak demand, demand response and energy efficiency as well as net capacity are the drivers in this year’s auction, able to cancel out the impact of a higher net cost of new entry, Barclays said.

Barclays expects to see 2,500 MW of new generation, uprates or imports entered into the auction and 1,200 MW of shutdowns or derates regionwide. UBS said it expects to see 700 MW of retirements. Barclays also predicts the auction will see 1,500 MW of new demand response and energy efficiency, compared to last year’s growth of 814 MW.

The installed reserve margin rose slightly in this year’s auction parameters, compared with last year’s auction, edging up less than 1% on the year to 15.6%. The IRM is the level of capacity reserves needed to satisfy the PJM reliability criterion of no more than one occurrence of load lost in ten years, the parameters said. The reliability requirement is used to establish the target reserve level to be procured in the annual capacity auction.