Capacity Markets

Historically, the outcome of the annual PJM Interconnection LLC (PJM) Reliability Pricing Model (RPM) capacity auctions have represented significant risk for AEP. The auctions are conducted three years prior to the delivery year and determine the prices AEP will be paid for its unregulated generating capacity.

In 2017, AEP sold the majority of its deregulated generating fleet because of the volatility associated with the capacity auctions. After the asset sale, the bulk of the remaining AEP generation in PJM operates under a regulated construct, and meets PJM’s capacity reserve requirements through a self-supply arrangement called the Fixed Resource Requirement (FRR) plan. Therefore, the PJM capacity auctions no longer have a significant impact.

In 2016, the PJM Interconnection posted the capacity auction clearing price for the 2019/2020 capacity year. The price set through the Base Residual Auction process cleared at $100/megawatt-day (MW-day) in the largest zone of PJM, known as the regional transmission organization (RTO) zone. The $100 price represents a decrease of approximately 39 percent compared with the price for the 2018/2019 capacity year set during the 2015 auction.

In June 2016, PJM began to operate its capacity construct under new Capacity Performance (CP) rules, which is a requirement that generators must meet their commitments to deliver electricity whenever PJM determines they are needed to meet power system emergencies.

The most significant change in the new rules involves the assessments to generators for non-performance. Beginning in 2016/2017, if a unit participating in RPM fails to perform during a PJM emergency, it will be assessed approximately $1,900/MWh in 2016/2017, increasing to approximately $3,500/MWh by 2018/2019. Fixed Resource Requirement (FRR) entities are exempt from non-performance assessments through planning year 2018/2019.

Beginning in planning year 2019/2020, FRR entities have the option to elect this financial assessment or can choose a physical non-performance assessment. The physical option requires an FRR entity to commit additional CP resources beyond the amount required as an assessment for those committed resources that experience performance shortfalls. Regardless of the method selected, PJM’s CP assessments are significantly higher than under the previous rules, and the impacts apply to both regulated and deregulated capacity resources.