Among corporate buyers, PJM is one of the most active markets in the U.S. for renewable energy power purchase agreements (PPAs). In order to find the right project in PJM, buyers must understand the market dynamics within the region and how they may impact pricing. At Edison Energy, we’ve been closely tracking movements regarding PJM’s capacity market and the “minimum offer price rule” (MOPR) (see PJM MOPR Ruling: Compliance Filing & Recent FERC Order Bode Well for Buyers for our most recent update), which is an influential factor in PPA pricing in the market at this time.
In PJM, both solar and wind projects rely on multiple streams of revenue, such as revenues from selling the electric generation itself, the project’s renewable energy certificated (RECs), and the value the project earns from PJM’s capacity market (applicable more so to solar than wind given the time of generation). The assumptions around expected revenue from these channels ultimately influence the products included in the bids as well as the PPA prices offered to prospective corporate buyers.
As PJM and FERC exchanged drafts of the revised MOPR rule, developers experienced a long period of uncertainty about their projects’ expected revenue streams. The core tradeoff was assumptions related to project RECs and capacity values, as the sale of project RECs to a compliance entity was seen as a “subsidy” that would make the project ineligible for capacity revenue.
How Have Prices Changed?
In October 2018, PJM filed a proposal to implement market changes (under a revamped MOPR) that would largely exclude renewable energy projects from receiving capacity revenue. Between late 2018 and mid-2019, we saw the median bundled solar PPA prices fluctuate between $33/MWh and $35/MWh (see Figure 1), as project developers took different approaches to evaluating the possibility of losing capacity revenue. During this time, we saw responses to the MOPR risk range from “assume business as usual” to PPA price increases.
More than a year later, FERC released an order in December 2019 that instructed PJM to expand the MOPR, making it increasingly likely that renewable projects would be ineligible for capacity revenue. With capacity revenue at risk, it became more common for solar developers to factor the risk of losing the capacity revenue stream into their PPA prices. This resulted in a 9.8% increase, or approximately a $3 increase, in median bundled solar PPA pricing from Q3 2019 to Q1 2020 (Figure 1).
In March 2020, PJM submitted a compliance filing to FERC that included two exemption mechanisms for renewable energy projects. In April 2020, FERC rejected rehearing requests on the MOPR and clarified that voluntary REC transactions can be exempted from the MOPR. Based on these recent policy developments and once FERC provides a final ruling, we expect to see additional shifts in the median PPA price offered in the rest of 2020.
Figure 1: Change in Bundled Solar PPA Pricing, 2018 Q4 to 2020 Q1
The orange line on the chart below reflects the median PPA price for all bundled, flat, unit-contingent, and hub-settled PPA prices received on a quarterly basis, from Q4 2018 through Q1 2020. The blue bars show the percentage change in median PPA price from the previous quarter (note: Q1 2019 reflects a smaller sample size than other quarters). The increase in bundled solar PPA pricing from Q4 2019 to Q1 2020 was largely a response to FERC’s December 2019 order.
What’s the Impact?
The MOPR has been and continues to heavily influence solar PPA prices in PJM. With recent filings (see: PJM MOPR Ruling) in March, April, and June and FERC potentially able to rule on it as early as mid-June, PPA prices will likely shift again in Q2 and Q3 2020. Beyond the MOPR, PJM solar and wind projects are also facing increased difficulties with interconnection and permitting, which have been exacerbated by COVID-19 stay-at-home orders.
The ruling on the MOPR and other pending capacity market changes in PJM won’t impact other wholesale energy markets, such as ERCOT or MISO. Each market has its own dynamics that influence project development, PPA pricing, and forecasted contract value. It is because of this varied and changeable landscape that Edison forges strong relationships with project developers to stay up to date with current market conditions, track PPA prices, and educate buyers to facilitate transactions in any market.