Energy Insights: What Your Company Needs to Know about the PJM Capacity Auction
Energy costs can dramatically influence your company's bottom line, and understanding the PJM Interconnection, LLC’s (PJM) capacity auction can unlock valuable insights that shape your company's energy strategy. PJM capacity auctions set the price for capacity throughout the PJM territory. Capacity is a key component of your energy costs, and the recent results from the auctions make it more important than ever to understand the implications. There are several ways that PJM capacity auctions impact energy costs for businesses and knowing how to plan around them can help your company mitigate risks and capitalize on opportunities.
What is PJM?
PJM is a regional transmission organization (RTO) and is the largest power grid operator in the United States. It coordinates the movement of wholesale electricity for 13 states and the District of Columbia. Acting as a neutral, independent party, PJM operates a competitive wholesale electricity market and manages the high-voltage electricity grid to ensure reliability for more than 65 million customers.
How the PJM Capacity Auction Impacts Your Company’s Energy Strategy
During a PJM capacity auction, power generators offer their energy capacity to be purchased by electricity suppliers such as the local utilities and other competitive energy retailers. These auctions set prices for future delivery, with both buyers and sellers negotiating the cost of keeping enough energy available to meet peak demands. With ever increasing demand and limited capacity, the prices have continued to climb in the short term. This market-based process ensures the reliability of electricity supplies, satisfying the growing demand for electricity in the United States. However, it also significantly influences the rates at which companies procure electricity, and this can impact your company in the following ways:
Price Variability: The auction outcome dictates the price for future electricity capacity, with fluctuations from one auction to the next that can potentially affect your company's energy budget. This may mean increased electricity costs during high-price auctions or savings when prices are favorable.
Budget Predictability: Knowing auction results is essential to position your company to budget effectively. With energy costs driving a significant portion of operational expenses in most businesses, understanding the expected price ranges help in maintaining financial stability.
Strategic Energy Decisions: A comprehensive understanding of auction outcomes can help your company strategize around its energy consumption. Adopting energy-efficient practices, negotiating favorable supply contracts or investing in alternative energy sources can help mitigate risks associated with price volatility.
Consulting with Energy Experts: A Strategic Move
The PJM capacity auction is held in advance of the delivery year to ensure there is sufficient power supply to meet future demand. Regulatory changes and market conditions can impact the timing and outcomes of these auctions. The Federal Energy Regulatory Commission (FERC) also plays a significant role in approving changes to market designs and rules that impact auction outcomes. For instance, this year FERC approved PJM’s proposal to set a price cap and price floor for its next two capacity auctions1.
Failing to monitor and account for the auction outcomes can lead to budgetary surprises and can greatly impact profitability. As electricity costs continue to rise, strategizing around capacity auctions offers a competitive edge. Skillfully navigating the landscape of energy pricing components requires in-depth knowledge of energy markets and regulatory requirements. Insights from energy experts can protect your company from unfavorable auction outcomes and empower your company to make informed decisions that maximize cost efficiency.
