The extraordinary result in the PJM capacity market auction sends a signal to power markets around the world of a looming power market crunch. The issue has even been raised in the US presidential election. Having only one golf club in the bag, just one policy tool for dealing with the issue, is clearly insufficient. A range of policy options are required as demand rises, plant retirements increase and new capacity fails to keep pace.
One interesting story this week. The thermal power arm of India's Adani Group, Adani Power, has set up a Middle Eastern arm in Abu Dhabi. Given the number of renewable schemes in the Gulf, it might have been expected the renewables arm Adani Green Energy would have moved in. But the renewables market is highly competitive in the Gulf. The thermal market is not.
While there are plenty of bidders for renewable schemes, there are not for the new baseload gas-fired capacity, which is clearly needed in the region. It is unclear what Adani Power Middle East will be up to but there is certainly a need for new blood in that market.
In the Pennsylvania-New Jersey-Maryland PJM region covering 13 US states and the District of Columbia, the development of new gas-fired plant has stalled after a fruitful decade in the 2010s.
The fact that prices in the latest capacity market auction jumped 800% from US$28.92/MW-day to US$269.92/MW-day for the 2025/26 delivery period should certainly send a development signal. But thus far just Calpine has come out and said it will look to develop new gas-fired generation, although it states clarity is needed on state-level air emission regulations.
In the meantime existing generators will make hay while the sun shines. Four term loan B refinancings have been put to bed since the auction, and stock prices are up for existing generators. LS Power has pooled all its gas-fired assets across PJM, ISO-NE, and NYISO into one 11GW unit Lightning Power and quickly raised a competitive debt financing.
The cost of the latest auction is US$14.7bn, up from US$2.2bn in the 2024/25 delivery period. Oops.
There are some specific factors that made the PJM capacity increase so much higher than would normally be expected. New Federal Energy Regulatory Commission rules in late 2019 impacted the way the PJM auction process was conducted and since then there have been plenty of new changes. The latest auction was the first in two years, a catch-up auction. Another auction is planned in December and then the normal auction schedule should return.
But a further specific factor is extreme weather events. But is this really a PJM specific event? Winter Storm Elliott in late 2022 saw 23% of the PJM generation capacity out of action so FERC called for better risk-monitoring of assets winning capacity contracts during extreme weather events.
The poor performance during the storm has been put down to the fact renewable subsidiaries in the region increased the headline generation figure, lowered capacity market prices but not capacity during cold and hot days. That said, renewable industry proponents say it was the gas-fired plants that really failed, froze up, during the storm. Maybe both are to blame.
Of course a key issue has been supply and demand – the ongoing retirement of coal-based load plant with new capacity not filling the gap due to transmission constraints and economics, that is higher construction and interest costs.
Capacity market payments are on the rise across the world. In the UK, prices have doubled. The 15-year T-4 capacity market cleared at £65/kw/year earlier this year, up from a record high of £63/kW/yr in the 2023 auction, £30.60/kW/yr the previous year and £18/kw/yr in 2020. That said, as in PJM, thus far only the existing generators have benefited. In 2022 a host of new gas-fired power plants were proposed, 3.5GW in total. But none have since been built.
The previous UK government started to raise the possibility of building new base load gas-fired plant, simply because the supply demand numbers do not add up in the next five to 10 years. Whether the new Labour Government follows this lead will be interesting. It could opt for the German solution and say 10GW of new gas-fired plant will be hydrogen fuelled at some time in the future.
Various solutions are, of course, needed. Renewable generation linked with storage is one. In PJM the new services queue is made up of 94% renewables. But in its report "Energy Transition in PJM – Resource retirements, replacements and risks," PJM said given the "operating characteristics of these resources, we need multiple megawatts of these resources to replace 1MW of thermal generation".
In PJM 40GW of existing generation could be offline by 2030.
