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PJM Skyrocketing Capacity Increases Impacting Cost of Electricity, May Portend Increases Forthcoming Nationally – Part 2

Energy News Update: 12 August, 2024 PJM Skyrocketing Capacity Increases Impacting Cost of Electricity, May Portend Increases Forthcoming Nationally –

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Energy News Update: 12 August, 2024

PJM Skyrocketing Capacity Increases Impacting Cost of Electricity, May Portend Increases Forthcoming Nationally - Part 2

  • Natural Gasis the largest source of power for the generation of Electricity; therefore, their pricing is highly correlated, which is why we focus on Natural Gas in our reports.

In our August 5th  Energy Update,  we explained why the recent PJM Capacity Auction will increase the cost of Electricity not only within the PJM footprint, but portends increases in other Regional Transmission Organizations (RTO) as well.

The PJM warned in their report “The significantly higher prices in their last auction confirm their concerns that the supply/demand balance is tightening across the RTO.”, as they warned was forthcoming in their Feb 24, 2023 report.

In the Feb 24, 2023 report, the PJM warned: 

PJM

“Our research highlights four trends below that we believe, in combination, present increasing reliability risks during the transition, due to a potential timing mismatch between resource retirements, load growth and the pace of new generation entry under a possible “low new entry” scenario:

  1. The growth rate of electricity demand is likely to continue to increase from electrification coupled with the proliferation of high-demand data centers in the region. (High Demand Data Centers Needed to Power Growth in AI. Due to the expansion of highly concentrated clusters of data centers certain individual zones exhibit more significant demand growth – as high as 7% annually)
  1. Thermal generators are retiring at a rapid pace due to government and private sector policies as well as economics.
  1. Retirements are at risk of outpacing the construction of new resources, due to a combination of industry forces, including siting and supply chain, whose long-term impacts are not fully known.
  1. PJM’s interconnection queue is composed primarily of intermittent and limited-duration resources. Given the operating characteristics of these resources, we need multiple megawatts of these resources to replace 1 MW of thermal generation.”

The bottom line is the PJM warned based on the above four factors, the risk of a “low new entry” scenario is increasing, which will negatively impact the cost of Electricity long-term. And as we said in our August 5th Energy Update, we believe the concerns expressed in the PJM reports won’t be confined to the PJM RTO, they are endemic throughout America’s RTOs, and as a consumer of Electricity there is little you can do about the Capacity increases imbedded in your cost of Electricity.

But as a consumer of Electricity in a deregulated state, you can mitigate the effects of the increases by as you can see in the chart below, reserving Electricity while Natural Gas, the largest source of power for the generation of Electricity is near its lowest price since 2000.

Natural Gas

In our July 29th Energy Update, we gave a detailed explanation of why we may be in the early stages of a Secular Bull Market, which could last for many years. We said Natural Gas is still by far the largest source of power for the generation of Electricity in America and will remain so for at least the next 5 to 10 years.  

We realize Capacity is the 2nd largest component of the cost of Electricity, and it will be increasing substantially, but you can keep your cost as low as possible by reserving long-term Electricit agreements while the largest component is near its lowest price since 2000.  

Not every client’s risk tolerance and hedging strategy are the same, but hopefully, today’s report will help put into perspective your risk/reward opportunities. We invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.

Ray Franklin
Energy Professionals
Senior Commodity Analyst

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