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When PJM Interconnection LLC held its first so-called capacity-performance auction on Aug. 21, few industry watchers doubted energy prices would rise. They did, in exchange for safeguards against widespread outages. But perhaps predictably not everyone was satisfied with the outcome.
Ethan Paterno, energy expert at PA Consulting Group said: "The auction should go a long way in delivering the reliability sought - if only because of the penalties utilities would incur should they fall short."
He added: "It was the first auction with PJM's capacity performance proposal, which really changed the landscape of how capacity resources and power generators operate in that market, and how they get compensated or penalized for their operations."
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Ethan Paterno went on to say: "The biggest change is that generators are now on the hook for their performance. . So the generator really wears the risk of non-performance, and the way PJM incents them to perform is through penalties for non-performance. They can get quite high. They can get as high as $3,000 to $4,000 per megawatt per hour for non-performance. It is really a game-changer in our view."
He concluded: "When the polar vortex happened in January and February of last year people saw that power plants that could burn fuel other than natural gas could make a lot of money. So what you actually saw was some power plants decide to go duel fuel on their own, just because they saw that pile of money potentially sitting out there for another polar vortex winter this year. So the market is responding. This (the new capacity-performance auction) is just an additional kick, if you will, to make sure that (the industry) does respond from a structural standpoint as opposed to just a price signals standpoint."