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High US power prices risk squeezing coal plants in grid auction

20th December 2022

By: Bloomberg

  

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Turbulent global energy markets are threatening to depress bids in a key auction on the largest US grid, potentially squeezing aging coal plants.

Shortages of natural gas and coal have pushed up wholesale power prices on the grid stretching from New Jersey to Illinois to their highest in more than five years. That’s created a windfall for many power plants, giving them breathing room to offer low bids in the auction for contracts to be on standby to provide backup capacity, according to analysts. Grid operator PJM Interconnection will announce the auction results Tuesday afternoon.

Those low bids threaten to put contracts out of reach for coal and natural gas plants saddled with high fuel costs and may prompt some to retire early. It’s likely to spur wider use of wind and solar power, and discourage development of new gas plants, according to Steve Piper, director of energy research at S&P Global Commodity Insights. It’s going to be another blow to coal power as US utilities continue to shift away from the dirtiest fossil fuel.

“It pushes things more in the direction of green energy,” Piper said in an interview. “Coal has nowhere to go but down.”

He expects the PJM clearing prices to slide to about $25 a megawatt-day, compared with $34.13 in the most recent auction in June and $50 a year earlier.

PJM typically holds its annual capacity auctions three years in advance of when the supply is needed, giving companies time to make investment decisions and build new plants. However, an intense debate over reforming the rules delayed the June event for more than two years and prompted the accelerated schedule that led to this December auction.

Bids were submitted by generators from December 7 to 13 and the contracts will come into effect in mid-2024.

Power plants make most of their money selling electricity. The capacity contracts, which pay generators simply to be on standby, are an additional source of income. Generators are raking in revenue selling electricity at high prices, and that’s making the capacity contracts less important, said Toby Shea, an analyst with Moody’s Investors Service. He expects to see an auction clearing price of $30 to $50.

Power-plant operators are getting plenty of revenue from selling electricity, said Shea. “They don’t need the capacity revenue.”

Edited by Bloomberg

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