The following article was originally published in the Ohio Capital Journal and published on News5Cleveland.com under a content-sharing agreement.
Around Ohio, utility bills are rising, and they may keep climbing. Next week, the regional grid operator PJM Interconnection will announce the results of its annual capacity auction. Under normal circumstances, most people ignore the proceedings. But the auction has drawn increasing scrutiny after a dramatic spike last year.
The price power generators can charge for supplying the grid shot up 833% — from about $29 to $270 to provide a megawatt of energy for a day.
That figure isn’t the cost of the energy itself. Instead, GridLab Executive Director Ric O’Connell said it’s more like insurance: PJM estimates its peak load, builds in a bit of extra wiggle room, and goes to the market to ensure it can serve that load throughout the year.
“And so, I’m going to pay those generators just a fixed fee to just basically make sure that they’re there,” he described PJM’s approach. “I’m not actually paying for them to provide me energy. I’m just paying for them to be there, really — kind of like an insurance policy.”
Using the last auction price, for instance, a hypothetical 1-megawatt power plant would get a check for $270 a day on top of the revenue from actually selling its energy.
Spread across PJM’s 13-state footprint, those higher capacity costs amount to a $12.5 billion increase in utility bills.
If last month’s utility bill was a shock, last year’s PJM auction could be the culprit. The new prices took effect in June, and they’ll run through next May.
Ohio cities served by the aggregator NOPEC shared flyers warning customers of 10-15% increases on their monthly bill and sharing tips on how to save power.
Throughout the PJM area, consumer rates went up about 20% according to John Gordon, policy director for Advanced Energy United.
Supply & demand
The basic function of the capacity market is to bring supply and demand into alignment by putting a value on power generation. When there’s plenty of power to go around, the price will be low, but when supply is tight it will be high. That price signal encourages companies to bring new plants online or retire old ones when they’re no longer economical.
The sharp uptick in capacity prices last year is a result of increasing demand for power and a slackening supply network.
Older fossil fuel plants are retiring, and PJM has been slow to connect new facilities to the grid. Some proposed plants have been waiting in line for six years. Meanwhile, Gordon said, demand on the grid has shot up.
“The economy has been going strong,” he said, “increases in manufacturing, increases in electric consumption, electric vehicles and so forth. And of course, data centers have had a dramatic impact on demand.”
Casey Roberts leads the Natural Resources Defense Council’s work on grid operators like PJM, and she explained that two changes last year took a big bite out of supply.
First, PJM changed its calculation for reliability. Just because a gas plant has a peak output of 100-megawatts doesn’t mean it’s always available, and the changes took a plant’s downtime into account.
“So, what that meant was that the PJM region then had a supply tightening,” Roberts said, “not because necessarily plants had retired, but just because they had previously been inflated.”
Second, PJM struck a deal to keep two large plants in Maryland online past their scheduled retirement, but then didn’t calculate their output in the capacity auction.
“That was almost 2 gigawatts of supply that was not reflected,” she explained, “and that caused perceived shortage in one region of PJM that then rippled out.”
In the upcoming auction those plants’ power will be taken into account.
The price collar
But Clara Summers from Consumers for a Better Grid worries even with a better supply picture, the current auction will still be bound by a “price collar.”
Following last year’s surge, Pennsylvania officials, led by Democratic Gov. Josh Shapiro, negotiated a price cap and floor.
Although her group supports the cap, of $325 per megawatt day, Summers argued that the floor is still quite high.
“So, the price cap does prevent the prices from skyrocketing even further in the face of this broken interconnection queue,” she said. “But it also means that prices can’t go below the floor — which $175 per megawatt day was much higher than (it was) historically.”
More fundamentally, Summers argued the auction is a raw deal for consumers because PJM’s backlog saps the effectiveness of the capacity auction.
“Fundamentally, the point of high prices is to signal new generation resources to come online,” she said. “But since PJM’s interconnection queue is frozen, these high prices cannot bring new generation online. And without new generation resources, prices can’t go down meaningfully.”
