PJM and MISO Q4 2024 Market Outlook: The Coal Catch-22

PJM and MISO Q4 2024 Market Outlook: The Coal Catch-22

The era of surplus capacity in PJM and MISO is ending. After years of low-capacity prices in an over-built system, load growth, retirements, and evolving reliability modeling are driving a resurgence in capacity value. This resurgence creates high revenue opportunities for those resources that can be available during periods of highest reliability risk. When considering resource accreditation, winter peaking, and the political environment, the regions look poised for a thermal renaissance.

In a recent webinar previewing Ascend's latest PJM and MISO forecasts, Dr. Gary Dorris, CEO at Ascend Analytics, joined Dr. Brent Nelson, Managing Director of Markets and Strategy, to discuss increasingly tight capacity markets, structural changes in supply and demand balance, implications for different generation asset types, and how the 2024 elections might impact long-term market dynamics.

Key Takeaways

  • With low accreditation for storage, 'willingness to pay' constraints to renewable buildout, and significant load growth, PJM and MISO are entering a phase of renewed thermal buildout.  
  • Demand from electrification alone will drive a need for new capacity in PJM and MISO. This need is compounded by thermal retirements, as well as by load growth from data centers and onshoring of manufacturing.
  • Winter peaking in PJM leads to low accreditation for many resource classes. Solar and energy storage receive minimal capacity accreditation​. With correlated forced outages and fuel supply risks, gas generation gets heavily de-rated as well.
  • Low capacity accreditation (PJM) and an optional capacity market (MISO) make merchant storage difficult in both regions. Battery energy storage will need to rely on offtake contracts, subsidies, or a value placed on emissions offsets. Renewable projects will also benefit from a value placed on RECs or emissions offsets.

Impacts of an Energy Transition

In an energy transition, two key steps must take place: mass electrification, and making electricity clean. This results in load growth: demand from electrification alone will drive a significant increase in capacity. Because enough dispatchable capacity must be available to meet demand when renewable energy supply is low, new unit entry will be needed to meet this increasing demand. However, buildout of renewable generation will result in an increasing supply of low variable cost energy, pushing down average energy prices while increasing the supply and price variability across multiple timescales. As average energy prices decline, most new entry will struggle to earn much margin in the energy markets. As battery energy storage buildouts exceed ancillary market depth, batteries become price-setters in the ancillary markets and reflect low opportunity costs across most hours.  

Cheap Energy and Expensive Capacity

When load growth necessitates new unit entry, low margins in the energy and ancillary markets mean that capacity prices must go (and stay) high enough to incentivize new resource builds. As Dr. Nelson noted, however, there exists little appetite to pay for new capacity buildout, especially within PJM. While high capacity prices in PJM should provide the signal to support new entry, generators appear hesitant to enter due to stranded asset risk, low capacity accreditation, and market instability. For MISO, Dr. Nelson believes that the optional capacity market does not reflect the true value of new capacity. Regulated utilities in MISO can procure and contract with new capacity resources as needed, which offers a more positive outlook for new resource buildout relative to PJM.

Resource accreditation also impacts capacity pricing. In PJM, winter peaking pushes capacity prices even higher due to low accreditation for many resource classes. With winter peaks likely to be long and overnight, solar and storage get heavily diminished capacity accreditation​. Because of correlated forced outages and fuel supply risks, gas generation gets heavily de-rated as well​.  

In such an environment, renewable energy projects struggle to survive on energy revenue alone. Offtake contracts will be needed, with REC or emissions value having to fill the gap. PJM and MISO, however, remain ideal locations for ‘Emissions First’ off-takers due to the fossil fuel heavy supply mix.  

Long-Duration and Flexible Energy Resources Needed

As average prices decline during the energy transition, capacity resources will need to be both flexible and able to operate for a long duration during extreme weather and critical system conditions when other resources are unavailable. While battery energy storage is flexible, it will struggle to have sufficient capacity accreditation and arbitrage potential to justify entry without policy support or off-takers. Coal generators will face increasingly difficult decisions whether to retire or to make the investments needed to stay online. Even given the market conditions supporting a thermal renaissance in PJM and MISO, coal’s high fixed costs and regulatory risks leave it ill-suited to navigating future market conditions​.  

Dr. Nelson noted that reciprocating internal combustion engines (RICE) and natural gas combustion turbines (NGCT) appear to be the most economic resources to meet load growth​ in PJM and MISO. Gas/storage hybrids may become attractive in many locations, as well. New natural gas combined cycle (NGCC) generators will likely not operate at high enough capacity factors to justify their costs, though value placed on emissions offsets could make them attractive.

Interested in Learning More?

Access the full webinar recording, which offers guidance for where, what, and when to add new capacity resources in PJM and MISO. The webinar also offers insights related to capacity price growth, projected renewable energy buildout, and updated energy demand forecasts.

AscendMI™ (Ascend Market Intelligence) delivers proprietary power market forecasts that have been trusted in hundreds of projects and resource planning activities, supporting over $25 billion in project financing assessments. Contact us to learn more. 

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PJM and MISO Q4 2024 Market Outlook: The Coal Catch-22

November 8, 2024

 | 

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The era of surplus capacity in PJM and MISO is ending. After years of low-capacity prices in an over-built system, load growth, retirements, and evolving reliability modeling are driving a resurgence in capacity value. This resurgence creates high revenue opportunities for those resources that can be available during periods of highest reliability risk. When considering resource accreditation, winter peaking, and the political environment, the regions look poised for a thermal renaissance.

In a recent webinar previewing Ascend's latest PJM and MISO forecasts, Dr. Gary Dorris, CEO at Ascend Analytics, joined Dr. Brent Nelson, Managing Director of Markets and Strategy, to discuss increasingly tight capacity markets, structural changes in supply and demand balance, implications for different generation asset types, and how the 2024 elections might impact long-term market dynamics.

Key Takeaways

  • With low accreditation for storage, 'willingness to pay' constraints to renewable buildout, and significant load growth, PJM and MISO are entering a phase of renewed thermal buildout.  
  • Demand from electrification alone will drive a need for new capacity in PJM and MISO. This need is compounded by thermal retirements, as well as by load growth from data centers and onshoring of manufacturing.
  • Winter peaking in PJM leads to low accreditation for many resource classes. Solar and energy storage receive minimal capacity accreditation​. With correlated forced outages and fuel supply risks, gas generation gets heavily de-rated as well.
  • Low capacity accreditation (PJM) and an optional capacity market (MISO) make merchant storage difficult in both regions. Battery energy storage will need to rely on offtake contracts, subsidies, or a value placed on emissions offsets. Renewable projects will also benefit from a value placed on RECs or emissions offsets.

Impacts of an Energy Transition

In an energy transition, two key steps must take place: mass electrification, and making electricity clean. This results in load growth: demand from electrification alone will drive a significant increase in capacity. Because enough dispatchable capacity must be available to meet demand when renewable energy supply is low, new unit entry will be needed to meet this increasing demand. However, buildout of renewable generation will result in an increasing supply of low variable cost energy, pushing down average energy prices while increasing the supply and price variability across multiple timescales. As average energy prices decline, most new entry will struggle to earn much margin in the energy markets. As battery energy storage buildouts exceed ancillary market depth, batteries become price-setters in the ancillary markets and reflect low opportunity costs across most hours.  

Cheap Energy and Expensive Capacity

When load growth necessitates new unit entry, low margins in the energy and ancillary markets mean that capacity prices must go (and stay) high enough to incentivize new resource builds. As Dr. Nelson noted, however, there exists little appetite to pay for new capacity buildout, especially within PJM. While high capacity prices in PJM should provide the signal to support new entry, generators appear hesitant to enter due to stranded asset risk, low capacity accreditation, and market instability. For MISO, Dr. Nelson believes that the optional capacity market does not reflect the true value of new capacity. Regulated utilities in MISO can procure and contract with new capacity resources as needed, which offers a more positive outlook for new resource buildout relative to PJM.

Resource accreditation also impacts capacity pricing. In PJM, winter peaking pushes capacity prices even higher due to low accreditation for many resource classes. With winter peaks likely to be long and overnight, solar and storage get heavily diminished capacity accreditation​. Because of correlated forced outages and fuel supply risks, gas generation gets heavily de-rated as well​.  

In such an environment, renewable energy projects struggle to survive on energy revenue alone. Offtake contracts will be needed, with REC or emissions value having to fill the gap. PJM and MISO, however, remain ideal locations for ‘Emissions First’ off-takers due to the fossil fuel heavy supply mix.  

Long-Duration and Flexible Energy Resources Needed

As average prices decline during the energy transition, capacity resources will need to be both flexible and able to operate for a long duration during extreme weather and critical system conditions when other resources are unavailable. While battery energy storage is flexible, it will struggle to have sufficient capacity accreditation and arbitrage potential to justify entry without policy support or off-takers. Coal generators will face increasingly difficult decisions whether to retire or to make the investments needed to stay online. Even given the market conditions supporting a thermal renaissance in PJM and MISO, coal’s high fixed costs and regulatory risks leave it ill-suited to navigating future market conditions​.  

Dr. Nelson noted that reciprocating internal combustion engines (RICE) and natural gas combustion turbines (NGCT) appear to be the most economic resources to meet load growth​ in PJM and MISO. Gas/storage hybrids may become attractive in many locations, as well. New natural gas combined cycle (NGCC) generators will likely not operate at high enough capacity factors to justify their costs, though value placed on emissions offsets could make them attractive.

Interested in Learning More?

Access the full webinar recording, which offers guidance for where, what, and when to add new capacity resources in PJM and MISO. The webinar also offers insights related to capacity price growth, projected renewable energy buildout, and updated energy demand forecasts.

AscendMI™ (Ascend Market Intelligence) delivers proprietary power market forecasts that have been trusted in hundreds of projects and resource planning activities, supporting over $25 billion in project financing assessments. Contact us to learn more. 

About Ascend Analytics

Ascend Analytics is the leading provider of market intelligence and analytics solutions for the energy transition. The company’s offerings enable decision makers in power development and supply procurement to maximize the value of planning, operating, and managing risk for renewable, storage, and other assets. From real-time to 30-year horizons, their forecasts and insights are at the foundation of over $50 billion in project financing assessments. Ascend provides energy market stakeholders with the clarity and confidence to successfully navigate the rapidly shifting energy landscape.

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