Gas-fired project owners and developers have welcomed the unexpected, indefinite postponement of this year's PJM Interconnection capacity auction, which was ordered by the U.S. Federal Energy Regulatory Commission on July 25, saying they expect a better outcome for them when the process does eventually take place.
The auction had already been pushed back from May to mid-August amid a back-and-forth between the grid operator and FERC over rule changes, such as a minimum offer price rule (MOPR), that would address state subsidies for coal-fired and nuclear assets (PFR, 7/24).
The additional delay prolongs uncertainty around capacity market prices for delivery year 2022/2023, which Moody's Investors Service described as a "credit negative" for existing merchant plants in PJM territory in an Aug. 1 report. The rating agency noted that "years of wrangling has yielded little forward progress" on establishing acceptable capacity market rules.
Nevertheless, developers and project finance bankers are upbeat about the postponement, with some expecting an order from the regulator on capacity market reform by the end of the year.
“I think the buzz is most people believe that this signals FERC has reached a decision on MOPR, which is seen as a big positive,” says Tom Rumsey, senior vice president of external and regulatory affairs at Competitive Power Ventures. “Once they issue an order then PJM can run the auction relatively quickly. It’s very possible that can happen by the end of the year.”
If the auction had taken place under PJM's existing rules in August, as planned, and FERC had subsequently issued an order requiring the implementation of MOPR, the grid operator may have had to scrap the results and start again, causing more disruption and potentially requiring settlements, Rumsey adds.
Developers and financiers expect any rule changes aimed at offsetting subsidies to result in higher clearing prices, which would benefit gas-fired plants, especially peakers that do not always generate energy sales revenues.
There is no firm indication yet of when FERC will issue its guidance on the rules. Some market participants have suggested that the auction could be held next April, a month before the auction for the following delivery year.
But a former senior FERC adviser tells PFR that the commission is unlikely to wait that long, pointing to the impending retirement of Commissioner Cheryl LaFleur, a Democrat, at the end of August, as a potential catalyst. The commission has been split between two Democrats and two Republicans since the death of Commissioner Kevin McIntyre in January, which could be a factor holding up any decision.
“If they’re deadlocked on what the answer would be, that would break the deadlock, and then there would be an order in September,” says the former FERC insider, adding that PJM could modify the tariff and submit a compliance filing within 30 days. “FERC had an order in New England in the CASPR [competitive auctions with sponsored policy resources] capacity market and gave guidance on what they would like the capacity to be in the presence of state subsidies, so it’s not like they haven’t ruled on these issues before."
In the meantime, project finance bankers say they do not expect the uncertainty to have an immediate impact on deals.
"Delaying a capacity auction for prices that will be realized three years down the road doesn’t change the big picture," says one, noting protective loan features such as additional cash sweeps in the event that capacity prices are lower than projected.