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Retirements forecast to counteract low gas prices at next PJM auction

SNL Energy

Peter Marrin

19 April 2012


Ron Norman and Ethan Paterno, energy industry experts at PA Consulting Group, shared their analysis of the forthcoming May PJM Interconnection LLC capacity market auction with Peter Marrin of SNL Energy.

Ron and Ethan said they still expect prices will converge for all capacity zones except for the American Transmission Systems Inc. zone in Ohio (ATSI), but that increased retirements since their last study could result in a structural shift in RTO capacity prices, with RTO capacity prices possibly reaching as high as $190/MW-day.

In their analysis, Ron and Ethan cited the likelihood of sustained low natural gas prices and pending environmental regulations as the market's primary drivers, and pointed to 15,000 MW of capacity that has submitted deactivation requests to retire from PJM's 2015/16 capacity auction. A vast majority of that sum – about 13,000 MW – have submitted their request since February. They noted that the capacity is primarily coal-fired with some natural gas.

In the article, Ron and Ethan are quoted as saying that ultimately, RTO capacity prices will depend on the number of retirements that actually occur. "All else equal, if 15,000 MW have submitted a deactivation request, 15,000 MW will retire. However, the complicating issue is the fact that a generator's deactivation request is reversible. If a generator submits a deactivation request and that request is accepted by PJM, the generator does not have to withdraw from the capacity auction; the generator can still submit a sell offer if it decides at the last minute not to retire. Consequently, there is some uncertainty surrounding the ultimate number of retirements."

Ron and Ethan consider it likely that ATSI will clear at a premium to the RTO with ATSI capacity prices possibly pushing north of $250/MW-day. "However, this will likely be a short-term phenomenon and ATSI prices could collapse to the RTO capacity price in the 2016/17 capacity auction, due primarily to transmission upgrades. RTO capacity prices will depend in large part on the number of retirements that actually occur.”

Ron and Ethan concluded that “the retirement of 15,000 MW appears to be an unlikely scenario. However, retirements in the 7,000 to 9,000 MW range are possible, which could result in RTO capacity prices of approximately $160 to $190/MW-day," they said.

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