Last weekend, I posted about David Cay Johnson’s dissection of supply rigging in the recent PJM capacity auction. RTO Insider has now published its detailed analysis of Exelon’s specific strategies. UBS Securities, especially their main electricity industry analyst Julien Dumoulin-Smith, has also issued a report on the situation.
UBS identifies at least four companies that deliberately withheld capacity from the auction to create tighter supply and raise prices for all of their plants that did clear the auction. UBS lists Exelon, NRG, Dynegy and FirstEnergy.
But who wins? Mostly EXC, NRG, FE, and DYN, but whole sector should benefit
Despite the lower MWs committed through the use of portfolio bidding, all four companies are among the biggest beneficiaries of the auction results. We suspect the entire sector will continue to benefit from the trade, however, more Eastern-oriented MAAC names could still be more muted in upside given the substantial announcement of new and converted gas-fired capacity.
The report also attributes “much” of this year’s big jump in the auction clearing price (from $59/MWday last year to $120/MWday this year) to market manipulation:
We attribute much of the ‘recovery’ in prices in the latest PJM capacity auction for 2017/18 to $120/MW-day (up from $59/MW-day last year) to a significant shift in bidding strategy, with ~9.7 GW of capacity opting not to clear. With no significant new EPA rules, we attribute much of the decline in generation to more aggressive bidding strategies, likely with EXC and NRG (the two largest generators in PJM) opting to bid in their portfolio at higher prices, given lower historic energy prices; bidding in these full costs (ACRs in PJM lingo) was discussed explicitly by EXC as part of its efforts to more rationally bid its nuclear port folio. Meanwhile, we suspect NRG has opted not to clear much of the EME Midwest Gen portfolio due to IL MPS standards, set to ratchet up for the portfolio in 2017 to yet a crucially tighter SO2 requirement. We also believe FE opted not to clear ~half of its capacity in the ATSI zone, continuing this theme.
Market Monitor Joe Bowring said in an interview Friday that all generation offers were screened by his staff and PJM to ensure market power was mitigated by offer caps. That included a determination that no generator with market power could offer at a price higher than ACR less net energy revenue. “We do not believe market power was exercised in the capacity market,” Bowring said.
UBS noted that “the outcome is highly dependent on the initial assumption for where the auction would have come out at without any withholding. Lower baseline assumptions generally incentivize more withholding since less revenue is removed by the withheld assets (less risk in the strategy) while overall net uplift increases as well.”
“While outright strategic collusion is prohibited, participants may have been `telegraphing’ their intentions to each other more subtly in public comments from more than one company regarding potential retirements, seeking higher Avoided Cost Rates (ACR), etc.,” UBS said.
So Bowring thinks nothing is amiss, and UBS sees the PIGS continuing their new-found strategy in coming years. Business as usual at the PJM cartel.