This is the second part of our guide to capacity auctions. Read the first part here.
In the first part of this guide, I laid out the steps in the capacity auction process, using PJM as an example. I explained how PJM procures the energy it'll need to supply end-users three years in advance. But now for the best part: how the auction's outcome eventually affects your energy bill.
Going back to the auction, note that every bid entered does not necessarily get accepted. We only needed 12,000 MW so the bids above the clearing price don't get accepted, even if they were placed before bids below the clearing price.
Just to review, here are the results of our mock PJM capacity auction:
Take the first two of these bids which didn't get accepted in the auction (in italics): DemandOne's $25,000/MWY bid.
DemandOne separated its 2,000 MW into two chunks and bid those in separately, and you can see that the second bid is higher. Why? Because it reflects a different type of customer set in that second batch; they're still great candidates for demand response, but have a higher cost to acquire.
What do I mean? Well, there are a lot of people who are ready, willing, able, and excited to participate in demand response (DR), so those are the customers that comprise that first 1,000 MW bid.
But the second 1,000 MW of customers might require more customized curtailment plans, for example, that take greater expertise and/or a longer time to develop a strategy for how they might participate. Because this second "bucket" requires more time and effort on DemandOne's end, they bid it in at a higher price to account for that.
And then there's PowerOne's additional bid that looks relatively high priced compared to the other bids.
PowerOne generates enough power to supply PJM's full capacity if it wanted to. But instead of bidding these in at a lower price, PowerOne put the remainder of its generation into a bid at the "end" of the auction at $50,000/MWY (or even $100,000/MWY in some cases).
Why doesn't PowerOne bid all its resources together at one bulk, lower price? There are a few reasons, but it's firstly because it wants to make as much money as possible so it attempts a higher bid on the chance that it might be the clearing bid.
Back to the auction outcome. If DemandTwo hadn't been in the auction, DemandOne's second tranche of megawatts would have been the bid that made the auction reach the 12,000 MW it needed and the clearing price would have been $25,000/MWY.
Now consider what would have happened if DR were not part of that auction at all...
At the 10,000 MW mark (when the PowerTwo bid came in) the auction would have jumped to the next available bid—PowerOne's high $50,000/MWY bid of 3,000 MW. And that would have set the price.
With DR, all resources get $20,000/MWY.
Without DR, all resources get $50,000/MWY. PowerOne makes more money, but ratepayers bills go up dramatically to foot PowerOne's increased costs.
