Giving the control
back to YOU

In a deregulated electricity generation market,
you have control over the choices that determine your energy costs.
How can you make the best decisions? Energy Guide sorts the relevant data to determine your best options. This reduces
your price risk and frees up your management time.

 

You need criteria-based solutions from trusted experts who can help your
company manage the energy marketplace to your advantage. That’s why
The Ohio Manufacturers’ Association has partnered with Scioto Energy.

Learn more about Scioto Energy’s expertise and experience.
Learn more about The Ohio Manufacturers’ Association.

What the Capacity is Going On?

Each May, PJM conducts a ‘capacity’ auction to ensure there is sufficient power supply to meet the needs of the forecasted consumption. The results of these auctions determine 15% to 25% of consumers’ electric supply rate. The main capacity auction is conducted three years in advance of the delivery year, thereby allowing customers to lock in capacity costs with certainty. Due to recent FERC rulings, PJM has not conducted a capacity auction since May 2018 — creating uncertainty around future costs. How is the market handling this problem and what can you do to protect your budget?

How Did We Get Here?

Over the past decade, the transition to new, more efficient power generation (primarily natural gas) has caused a dramatic drop in the energy markets, forcing the retirement of older, inefficient (primarily coal) plants. This also caused a decline in nuclear power profitability, resulting in the owners of the plants seeking shelter through state subsidies. So far, lawmakers in Illinois, Ohio, New Jersey, New York, and Connecticut have passed legislation to provide nuclear power plant subsidies in order to keep these plants profitable.

Subsidies for some energy producing assets — but not all — distorts the free market and creates an uneven playing field. To address this distortion, FERC raised the minimum capacity auction bid price for those power plants receiving subsidies. Due to this bidding rule shakeup, PJM must modify the auction market design and seek FERC approval. To date, a new market design has not been approved. The result: a delay of two capacity auctions, thus eliminating certainty around capacity costs beyond May 2022.

What Will the New Auction Design Cost?

The cost estimates to consumers of implementing the minimum capacity auction bid price requirement have varied wildly from zero cost impact to more than $2 billion per year, depending upon which expert you ask. The reality is we will not really know the impact until the auction is held. To add to the uncertainty, there is no decision about when the next auction will be held. Many expect this to occur during the first quarter of 2021, but no official date has been established.

Problems for Consumers Negotiating Contracts

Until the next capacity auction is held, customers must navigate unknown costs – of 15% to 20% of their bill — when procuring and contracting for their electric supply. For those customers seeking to take advantage of the low energy markets with a multi-year supply term, one deal structure is to have the supplier pass through the capacity charges. This allows the supplier to procure the energy while not getting bogged down or limited in term by the unknown capacity market.

Some suppliers are offering to fix capacity costs, but buyer beware! In nearly all cases, there is language in the terms and conditions that allow the supplier to true-up the charges once the auction rates are known. In other words, capacity charges are not really fixed, and you end up with a capacity pass-through product.

Here’s another caveat for buyers who are comparing offers in which the capacity price is fixed: Suppliers must assume some value for the unknown capacity years in their offer. To provide optically competitive rates, these assumptions can be very aggressive making an apples-to-apples comparison very challenging.

Actions You Can Take

Costs for the capacity component beyond May 2022 are up in the air and any guess of these costs will be difficult to support. Consider these three steps to take more control of the unknown costs:
1) Enter multi-year supply contracts with eyes wide open with respect to the terms and conditions around capacity costs. The best way to evaluate supplier offers during the bid process is to entertain capacity pass-through offers.
2) For budgeting purposes, assume the average of the last five years of capacity auction rates. These five years contain a wide variation of auction results and provide a reasonable assumption that can be supported by data.
3) Communicate the uncertainty around these costs with your finance team and update the budget once the auction is held.

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