PJM Interconnection announced the results of their capacity auction last week. This is where suppliers of electricity quote prices to provide surge capacity for periods of high demand (typically hot summer days). It used to be uneventful until last year, when the clearing price was 9X higher than before. This led to the price hikes now rolling across PJM’s region, which saw your blogger’s bill rise 35% (see Power Auctions Are Getting Interesting).

The clearing price of $329.17 per MegaWatt Day was +22% from last year, and would have been higher except for the price cap imposed by FERC. Without the cap, PJM indicated the cleared price would have been $388.57, +44%. PJM expects this to translate into 1.5-5% price increase for consumers.

PJM also noted that this only covers about half the new power demand they expect to see, because of growing data centers.

JPMorgan wrote a cheery research note on the auction (“PJM Paranoia proves perilous”). I was initially confused by this, wondering why higher electricity prices could be good. It soon became clear that power providers such as Talen Energy and Constellation Energy were the auction beneficiaries. Talen reported that this would add $805 million to capacity revenues. Its stock rose 8% on the news.

This is capitalism at work, ensuring that electricity will be available when needed by discovering the price necessary for that to happen. The mix of this guaranteed surge capacity is: 45% natural gas, 21% nuclear, 22% coal, 4% hydro, 3% wind and 1% solar.

Over three quarters of this power is from dispatchable sources (gas and coal) that can be ramped up when needed. 4% is weather-dependent. Demand from data centers is rising.  Supply isn’t keeping up and state policies are increasing the share of intermittent power that’s available.

The usual crowd of apologists for renewables complains that much more solar and wind could be connected to the grid if only PJM would move faster. The impact of each new source needs to be evaluated in terms of the impact of intermittent supply, since conventional power is available when needed rather than weather permitting.

PJM also noted that many projects applying to be connected have yet to be built and have run into problems outside PJM’s scope, such as with, “permitting, supply chain constraints and evolving project economics.”

Grid operators need to consider factors such as the Effective Load Carrying Capacity (ELCC). This contrasts with Unforced Capacity (UCAP). ELCC is typically lower than UCAP, especially for renewables. Moreover, as more intermittent power supplies are added to a grid, their low ELCC drags down the system’s overall ELCC. It means that ever more excess capacity is required as intermittent power gains market share.

This is why it’s so disingenuous for renewables advocates to claim that their solution is the cheapest. As the results of this auction and last year’s show, adding renewables to a grid increases the cost of spare capacity that must be available for when it’s not sunny or windy.

Ironically, offshore wind has been found to have a high ELCC, sometimes even as good as gas combined cycle power plants. But the US has very little offshore wind, and numerous projects have been canceled due to rising costs, supply chain issues and the new Administration’s general hostility to wind.

Surveys show that consumers value reliability and price. Climate change has been receding as a concern, as was apparent in November’s election.  But left-wing climate policies continue to have a deleterious impact.

Solar and wind can work in certain situations though. Enbridge is building a 600MW solar farm near San Antonio, TX which will be fully dedicated to supporting Meta data centers.

Puerto Rico is laboring under an impractical zero carbon mandate. The electricity supply is notoriously unreliable, and many homes have generators to compensate for regular power cuts. Consequently, a law requiring 40% of the island’s electricity to come from renewables this year is (a) not addressing their most important problem, and (b) hopelessly out of reach. Last year 62% of its power came from petroleum products, meaning diesel, 24% natural gas and 7% renewables.

New Fortress Energy (NFE) has been negotiating with Puerto Rico over a $20BN LNG contract, although those discussions have recently been broken off by the PR government. They have few good alternatives and have begun negotiations for 30-day emergency LNG supply contracts. NFE’s stock rose on the news, perhaps reflecting the market’s view that PR will ultimately have to return to negotiations.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

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