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Exelon on the 2014 PJM Capacity Market Auction

• Capacity Market Rules Do Not Recognize Nuclear’s Reliability Attributes

• Three Plants That Didn’t Clear Auction Likely to Lose Money ‘for That Period’

June 12, 2014—Last month PJM Interconnection, the regional transmission organization that coordinates the movement of wholesale electricity in a grid region encompassing most of the mid-Atlantic and some parts of the Midwest, held its annual capacity market auction to ensure the availability of electricity generation capacity between June 2017 and May 2018. NEI talked to Joseph Dominguez, Exelon Corp.’s senior vice president for governmental and regulatory affairs and public policy, on the results of the auction.

NEI: Exelon has said that Quad Cities and Byron in Illinois and Oyster Creek in New Jersey did not clear the PJM capacity auction. Why not?

Dominguez: These auction results reveal that the market does not sufficiently recognize the significant value that nuclear plants provide in terms of reliability and environmental benefits. As proven during the record-cold temperatures this winter, nuclear plants are an incredibly reliable generation source, typically producing power 24/7 regardless of weather. And they do so without producing emissions, which makes them an indispensable resource if we are to meet greenhouse gas reduction requirements outlined in the draft regulations from the U.S. Environmental Protection Agency. Yet some of our nuclear plants face a perfect storm of economic challenges that threaten their continued operation. These include an influx of low-cost natural gas, slow load growth, and the unintended consequences of market structure and government policies that subsidize renewables and fail to recognize nuclear’s unique value as a clean, reliable workhorse of the electric grid.

NEI: What does this mean for the future of the plants that didn’t clear?

Dominguez: The plants that did not clear will not receive capacity payments between June 2017 and May 2018. This means expected revenue for our Quad Cities and Byron nuclear plants in Illinois and Oyster Creek in New Jersey will likely fall short of their anticipated costs for that period. Despite these disappointing results, operations at the plants will not be affected in the short term. It’s important to remember that the results of this auction will not be felt until 2017 and are in effect for one year. We have made no final decisions concerning the futures of our challenged nuclear units, although in Illinois we have committed to postponing any decisions on the future of these plants until at least June 2015. At the same time, if we do not see a long-term path to sustainable profitability for a particular unit, then we will consider all options, including unit shutdowns.

NEI: How much of Exelon’s decision-making process on possible plant retirements hinges on the auction results?

Dominguez: We review the economic viability of our plants based on a variety of factors. These auction results reveal the economic stress on nuclear units. Subsidized competition, uncertain environmental policy and certain tilted market rules also are jeopardizing the plants’ future prospects. We will work with all stakeholders to explore market-based solutions that will be good for consumers, preserve jobs, protect our environment and ensure reliable, affordable, clean energy for Illinois, New Jersey and our nation.

NEI: What is causing this problem in capacity markets?

Dominguez: There are a number of factors at play. Capacity market rules in PJM wrongly equate demand-response resources, which are only obligated to be available a handful of days per year, with baseload resources that are available 365 days a year. Nuclear and other generation technologies make a commitment to be available for the long haul, whereas competing demand response can come and go from the market at will. Likewise, nuclear plants, which have up to 18 months of reliable fuel on site, are paid the same as power plants that depend upon fuel sources that can be interrupted, causing them to shut down at critical times, as we saw during last winter’s record-cold weather. Finally, current market rules do not adequately restrict bidders from submitting speculative offers in the auction.  While PJM has taken some steps to level the playing field, the reality is that nuclear capacity is not compensated for the unique reliability attributes that it provides to the market.

After last winter’s harsh weather nearly caused a severe energy shortfall, regulators, industry stakeholders and policymakers have begun to understand the importance of baseload power with dependable on-site fuel. Nuclear units kept the lights on when other generation—including coal, oil, natural gas and wind—could not get fuel or otherwise failed to start. Yet current market rules inadequately value those units for their reliability.

NEI: How do EPA’s recently released carbon regulations for existing power plants play into nuclear plant economics?

Dominguez: We are at an important crossroads for the country. The polar vortex proved the value of having baseload nuclear power, which supported the system when many power plants failed due to cold weather or because they could not obtain fuel. Now that the EPA has released new rules aimed at curbing greenhouse gas emissions from power generation, Exelon’s nuclear fleet is more important than ever to the states where we operate and the nation.  Yet, the market is telling us that some of these plants are not needed and, economically, should retire. We are pleased that EPA’s draft rule recognizes the critical importance of supporting the continued operation of the nation's nuclear fleet. We look forward to working with EPA and key stakeholders during the coming months as the rule is finalized.