Power-grid operator's auction aims to ensure reliable electricity supplies

During the severe cold snap of January 2014, about 22 percent of the Philadelphia region's power generators were unable to deliver electricity as promised. Their plants were incapacitated by frozen equipment, frozen water, and frozen fuel.

The crisis, which caused some customers' electricity bills to more than double, triggered alarms at PJM Interconnection, the Valley Forge operator of the region's power grid. It set about to change its rules to improve electricity reliability in its territory, which covers all or parts of 13 states and the District of Columbia.

On Friday, the outcome of PJM's efforts will be revealed, when it announces the results of an auction setting the price for its capacity market in 2018-19. The capacity market is a system for paying power generators to assure enough supply is available.

After much litigation, PJM changed the rules this year to better reward power generators that deliver as promised and penalize those that fail. Capacity prices are expected to increase, which will be recovered in higher electricity charges.

"All eyes are watching this," said Paul Patterson, an energy analyst for Glenrock Associates in New York.

Billions of dollars are at stake. The auction results will be announced after the stock market closes Friday, because they could influence the fortunes of energy suppliers that generate most of the region's power and influence their decisions to upgrade or retire power plants.

PJM says its capacity market, formally called the Reliability Pricing Model, ensures long-term grid reliability by procuring the appropriate amount of power supply needed to meet predicted energy demand three years in the future.

Capacity costs account for about 15 percent of the typical energy bill. PJM expects the new rules will increase monthly costs about $2 to $3 per household in 2018.

"Think of this like an insurance policy," PJM says on its website. "For a small additional cost (payment to generators who perform well), consumers will have greater protection from power interruptions and price spikes during weather extremes."

Analysts estimate that the auction price will settle between $150 and $185 per megawatt per day for 2018, up from $120 in 2017. Larger power units can generate more than than 1,000 megawatts.

The auction is taking place amid a dramatically transforming electricity market, as aging coal-fired power plants are being shut down and replaced with high-efficiency plants fueled by new discoveries of natural gas.

Electricity markets are further complicated by the growth of "demand-response" - customers able to curtail power consumption at peak periods - and the influx of new renewable-energy supplies such as the giant wind farms sprouting from the Great Plains.

In June, the Federal Energy Regulatory Commission (FERC) approved PJM's restructuring of the capacity market, saying the changes were justified by "the combination of deteriorating resource performance and the ongoing change in the resource mix in the PJM region."

PJM hopes the new "capacity-performance initiative" will induce power suppliers to invest in weather-resistant equipment or flexible fuel capabilities to meet demand during emergencies.

But some critics, including FERC Chairman Norman C. Bay, question whether PJM's new market design will work. Bay was the sole dissenter on the five-member panel.

Bay wrote in his dissent that the "incentive structure creates an opportunity for resources to profit from non-performance" and may undercut the very aim that it seeks to achieve.

He said the flaw "may result in billions in additional costs for consumers without achieving its intended aim."