Capacity costs effect on today’s low energy prices
Energy prices at the end of 2015 dropped to the lowest level since 2002, but some electricity consumers may have noticed increased capacity costs on their monthly electricity bills. Capacity rates are non-negotiable and are determined in advance. In the PJM Interconnection region, which is the transmission system, or grid, that moves electricity in all or parts of 13 Mid-Atlantic and Midwest states, capacity rates are set three years prior to taking effect on June 1st of each year.
Capacity rates increased on June 1, 2015, to either $136.00 or $167.46 per megawatt day (MW-day), for all electricity customers in the PJM Interconnection region. Capacity rates will decrease on June 1, 2016, and then increase again on June 1, 2017 and June 1, 2018 for all customers.
The necessity to increase capacity stems largely from extreme winter weather events that occurred in 2014. On January 7, 2014, temperatures dropped to 4 °F in Philadelphia, 10 °F in Richmond, and -16 °F in Chicago. PJM called an emergency load response event, and recorded its highest winter peak ever at 141,396 megawatts. Cold weather burdened all types of power generation, including gas, coal, and nuclear power plants.
Capacity rate increases are partly because of U.S. Environmental Protection Agency rules and regulations that force the retirement of many coal-fired power plants. The U.S. Energy Information Administration forecasts that 16% of coal-fired capacity available at the end of 2012 will be retired by 2020. Adequate capacity is a concern, causing capacity rates to increase. Capacity affects customers, grid operators, and electricity suppliers in the PJM territory.
“Two consecutive cold winters with natural gas interruptions, and the rapid pace of coal retirements, have put considerable pressure on the system,” said PJM CEO Terry Boston. “Clearly, PJM had to act decisively with the introduction of Capacity Performance to ensure firmer fuel supplies and other improvements for the continued reliability of the grid.”
To ensure sufficient energy is always available to meet demand, electricity suppliers purchase adequate capacity to cover their total customer peak load. All suppliers must pay capacity charges to the electricity utility company for all customers, but whether those charges are passed through to customers depends on supply contract conditions. If a supplier passes through capacity charges to customers each month, electricity bills are directly impacted. If a supply contract stipulates that adders, such as capacity charges and non-energy costs, are fixed, then bills are not affected. Although each supplier contract is different, many suppliers omit capacity charges and non-energy costs from their fixed-price offers.
It remains to be seen how increased capacity costs will affect utility supply tariff rates in the PJM territory. It seems reasonable to expect that utilities will include increased capacity costs in supply tariff rates.
APPI Energy provides data-driven procurement and consulting solutions to members. APPI Energy has monitored the PJM capacity situation for the past several years. The team of regulatory experts will talk with vetted suppliers about these cost increases, and determine how each supplier plans to address increases in capacity costs. APPI Energy continues to gather information and consult customers. For more information, contact 800-520-6685 or firstname.lastname@example.org.
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