When PJM Interconnection LLC held its first so-called capacity-performance auction on Aug. 21, few industry watchers doubted energy prices would rise. They did, in exchange for safeguards against widespread outages. But perhaps predictably not everyone was satisfied with the outcome.

The long-term contracts auction - covering the period between June 2018 and June 2019 - took place under new federal rules designed to help avoid a repeat of the spike in prices and plant failures seen as a result of the 2014 polar vortex, which strained natural gas supplies. 

Ethan Paterno, a power markets expert at PA Consulting Group in Denver, said the auction should go a long way in delivering the reliability sought - if only because of the penalties utilities would incur should they fall short.

"It was the first auction with PJM's capacity performance proposal, which really changed the landscape of how capacity resources and power generators operate in that market, and how they get compensated or penalized for their operations," Paterno explained.

"The biggest change is that generators are now on the hook for their performance. . So the generator really wears the risk of non-performance, and the way PJM incents them to perform is through penalties for non-performance. They can get quite high. They can get as high as $3,000 to $4,000 per megawatt per hour for non-performance. It is really a game-changer in our view," Paterno said.

There's no doubt of that. On the other hand, as a result of the auction, an extra $3.4 billion will end up in the pockets of PJM power providers. PJM, based in Valley Forge, Pennsylvania, serves more than 61 million people from New Jersey to North Carolina and west to Illinois.

PJM does not release the identities of generators whose bids were selected in the auction. But the providers most likely to benefit include NRG Energy Inc., Exelon Corp., Calpine Corp., Dynegy Inc. and Public Service Enterprise Group, according to industry analysts.

"Everything investors generally hoped for happened," Douglas Simmons, a fund manager at Fidelity Investments, told the Wall Street Journal.

Payments to generators in PJM's 13-state territory for the covered period will jump to $164.77 a megawatt per day, compared to $120 for the previous 12 months set in an auction last year.

Prices in the Chicago region and parts of the East Coast will go up even more, with a stretch from New Jersey to Virginia seeing prices hit $225.42 a megawatt-day, up 88% for most of that area.

At a minimum, ratepayers served by one of PJM's utilities will see an increase in their monthly bills amounting to $2 to $3. In worst-case scenarios, they could go up nearly $100 more in the 12-month span covered by 2018-19 contracts.  

Paterno, for one, believes that individual power suppliers will react to the new PJM performance capacity regulations in one of three ways: by entering into firm fuel supply and transport agreements to ensure they have fuel 24/7 when called upon; by going to a dual-fuel arrangement in which they burn a second fuel source in addition to natural gas; or to do nothing.

"When the polar vortex happened in January and February of last year," he said, "people saw that power plants that could burn fuel other than natural gas could make a lot of money. So what you actually saw was some power plants decide to go duel fuel on their own, just because they saw that pile of money potentially sitting out there for another polar vortex winter this year. So the market is responding. This (the new capacity-performance auction) is just an additional kick, if you will, to make sure that (the industry) does respond from a structural standpoint as opposed to just a price signals standpoint."

John Moore, senior attorney with the Natural Resources Defense Council, had a different take on things.

"I think fewer new resources came into the market than some people had expected," Moore said of the auction results. "I think there was somewhere around 2,500 MWs of new resources."

Moore also worries about one aspect of the new PJM requirements - whether they might be too restrictive for some energy players.

"We're concerned about the continuing eligibility of sufficient demand resources that are necessary to maintain reliability and mitigate market power, because PJM has imposed some pretty stringent requirements that we don't think are entirely appropriate for all demand response," Moore said. "I think the numbers to some extent show that, and will certainly need looking at in the next year to see what happens, especially next May, when the next big auction will take place."

Moore wondered if timing played a role in the Aug. 21 auction that limited the number of new resources coming into play, and like Paterno, he wondered whether dual-fuel strategies will become more popular in.

"Something else PJM was trying to encourage was a marriage between some of the variable energy resources like wind and solar and farm resources with natural gas. I don't think any of those types of hybrid combinations occurred," Moore said.

"There probably wasn't enough time for the business deals to be made," Moore suggested. "The new rules were only a few months old when PJM held their auction. I think that will be an interesting dynamic next year. 

"Will more of these renewable resources be able to hook up with natural gas and energy storage to be able to provide hybrid capacity product? The rules allow it, but we just didn't see it this year, which is not to say we won't see it next year." 

The auction yielded 619 megawatts of demand response, a small fraction of the total 95,096 megawatts procured. 

For its part, PJM seemed happy with the results:

"The stronger requirements for capacity performance represent an insurance policy for consumers against capacity shortages and dramatic price spikes," PJM Executive Vice President Andy Ott said in a statement. "The auction prices are in line with the costs of securing this dependable capacity."

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