As we have discussed in a previous blog, capacity costs are the second largest component of an electric supply rate. It’s important to understand how they are calculated. Capacity prices are decided through auctions, which are organized by the regional transmission organization (RTO).
In early June, PJM, the RTO that coordinates the movement of wholesale electricity in all of Ohio, announced the Base Residual Auction (BRA) capacity clearing prices for the years 2020/2021. Capacity auctions are RTOs’ way of securing electricity capacity for future use. There are various types of generators that will bid in, including wind, solar, coal, and natural gas. Different generators will bid a specific number of megawatts (MW) at a price based of numerous factors, including operating costs.
For example, a natural gas plant might bid in 50 megawatts at $100 per MW day. Although the plant is now required to have 50 MW of electricity available 3 years from now, their compensation isn’t necessarily $100 per MW day. The final or clearing price is equal to the highest bid made that cleared the auction. So, in our example, if a coal plant bid in at $120 MW, the natural gas plant will be compensated $120 per MW day. These auctions are conducted for capacity 3 years in the future and are also adjusted periodically in incremental auctions.
In the latest BRA, most of Ohio cleared at $76.83 per MW day; however, the Duke Ohio region cleared at $130.00 due to potential generation plant retirements. The 2019/2020 BRA capacity prices for all of Ohio cleared at $96.77 per MW day and 2018/2019 cleared at $162.44. The trend of decreasing capacity costs can be seen in current electricity prices across Ohio, as capacity can comprise around 25% of a supply rate. Now that we are seeing lower capacity costs in 2020 and 2021, longer term supply agreements have become less expensive than shorter term agreements. Although specific capacity charges will vary between customers, the capacity price trend is looking favorable for customers that choose to shop for their electricity options in the competitive market.