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Excess Capacity in PJM

December 18, 2019

Markets - PJM

Despite essentially flat growth in demand, the electricity generating capacity in PJM has grown by more than 15,000 MWs from 2009 to 2017.   Almost all of this additional capacity has been in the form of new natural gas plants.  As a result, the reserve margin (the amount of excess capacity above peak demand) in PJM has soared. In 2018, the expected summer reserve margin was 16.1%. The actual reserve margin was more than double what was forecasted, coming in at 32.8%. This reserve margin has been increasing with time.  According to the North American Electric Reliability Corporation, the anticipated reserve margin in 2021 is 45%.

Despite this surplus, S&P Global Market Intelligence reports that more than 29,000 MW of new natural gas plants are planned or under development throughout PJM.  PJM officials point out that its electricity market has consistently provided reliable power at historically low prices. Critics, however, claim that PJM has facilitated the creation of a gluttonous power market that serves the interests of big utilities and power-plant developers as opposed to a competitive market that gets sufficient electricity to customers at the lowest possible cost.

Excessive amounts of generation should put downward pressure on capacity prices throughout PJM.  However, FERC and PJM have been at odds over the rules that govern capacity markets.  This dispute postponed the auction that was to establish capacity prices from June 2022 to May 2023.  This has created some uncertainty around future capacity prices despite the fact that there is a supply excess throughout PJM.  

Read the full report from S&P here

Topics: Markets PJM

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