It’s Time to Rethink How We Plan for Electricity Demand

By Marie Albiges

Exelon wants to change how far in advance electricity suppliers commit to having power available for customers in the future. Today, those commitments are made about three years before the power is needed, locking customers into potentially elevated costs based on forecasts that may become outdated.  

We filed a complaint with the Federal Energy Regulatory Commission (FERC) on Nov. 3 that asks FERC to direct PJM Interconnection LLC (PJM) to procure power closer to the time that power is needed. PJM is a regional grid operator that serves 13 states and Washington, D.C.    

PJM currently uses what's called a capacity market to help make sure enough power-producing resources are available when demand is highest. Through an auction, eligible resources such as power plants, demand response, and energy storage compete for payment in exchange for committing to having power available when it's needed.  

Right now, PJM runs its auction roughly three years before that power supply must be available, and sellers promise to be available for one year at a time. That's like planning a huge party three years from now, estimating how many guests will show up and making sure there will be enough pizza ovens available to make all the pizzas you'll need to feed everyone. If you plan for 2,000 guests but only 1,800 show up, you will end up paying for too many ovens based on your original estimate.

Exelon believes the auction should be held roughly two months before the capacity is needed rather than three years ahead of time. This is known as a prompt auction, and it is how all other U.S. regional electricity markets are structured.  

Holding the auction closer to when the power is needed would allow PJM to use more current information about how much electricity customers are likely to need and how much generation will actually be available to meet that demand. That would reduce the risk of procuring more capacity than customers actually need, and at higher cost, based on forecasts made years earlier.    

“We want to avoid a situation where customers are paying extraordinary prices into a market that we know is broken and for which they're not getting value in return,” said Jordan Kwok, Director of Federal Regulatory Affairs for Exelon.

A move to a prompt auction schedule alone will not solve the affordability challenges facing the region. PJM also urgently needs more generation to keep pace with growing electricity demand.  

The problem with planning three years ahead 

There was originally a sound reason for securing power capacity three years ahead of time: It gave developers time to build new generation if the market signaled that more supply was needed.  

Today, many new power projects take considerably longer than three years. Developers have to secure land, permits, financing and equipment, get approval to connect to the electric grid, and then actually build the facility using materials that are more difficult and more expensive to get.

One analysis cited in Exelon's FERC filing found that large natural-gas projects take an average of nearly 11 years from requesting a grid connection to beginning commercial operation. That means even if today's high prices are shouting, "We need more power plants!" developers generally can't build one in time to respond to a capacity auction held only three years before the power is needed.  

They may also be reluctant to build one even if they could, based only on a one-year revenue commitment from the market.

These days, a lot can change in three years when it comes to electricity usage and supply. Given the current political climate, a data center previously expected to open might be delayed or even cancelled. A power plant expected to run might retire. A new project might not be built on schedule.

Imagine PJM's forecast assumes dozens of new data centers will come online three years from now, adding significantly to electricity demand. If far fewer projects materialize, customers could still be committed to capacity quantities and costs established years earlier based in part on that higher demand forecast.  

But to be clear, using newer, better information and reducing the risk that customers are locked into unreasonable costs based on old forecasts doesn't guarantee lower prices, and it doesn't solve PJM's greater need for more generation.  

What a prompt auction can do is move that decision closer to when power is needed, when there is more current information about how much electricity customers need and how much supply is available.

The filing addresses one piece of a much larger challenge. PJM, states, federal regulators and other stakeholders still need to determine how to bring enough new generation online to reliably meet growing electricity demand over the long term. Through The Exelon Promise, the company is advocating for broader changes aimed at keeping energy affordable while ensuring the region has the reliable power supply customers depend on.