NEW YORK--(BUSINESS WIRE)--The delay of the transition capacity auctions and changes to their parameters highlight the fluid and challenging operating environment for merchant generators in the PJM Interconnection LLC (PJM) zone, according to Fitch Ratings.
However, we view PJM's decision to delay its upcoming transition auctions to allow demand response (DR) and energy efficiency (EE) providers to participate as credit neutral. Fitch expects the inclusion of DR and EE providers to have a modest impact on the outcome of the transition auctions given their relatively small sizes in recent auctions and the need to bid year-round availability with high reliability.
The PJM capacity performance product is intended to reward generators that are capable of sustained operations during peak load periods and extreme weather events. However, the proposed capacity performance plan is not without risk since there are substantial penalties for non-performance. DR and EE providers were initially excluded from the transition auctions but, as instructed by the Federal Energy Regulatory Commission, PJM will allow these providers to participate. The transition auctions, originally planned for late July and early August, have been delayed to allow DR and EE providers to prepare bids. These are now likely to be held in September, after the base residual auction for the 2018/2019 delivery year.
Fitch considers the introduction of performance capacity as a potentially credit supportive development for merchant generators operating in the PJM zone. The financial impact will be gradual, starting in the 2016/2017 delivery year, and could become very meaningful in the 2020/2021 delivery year when capacity performance resources will be the sole resources eligible to participate in PJM's capacity market.
With their base load dispatch profile, fuel on site, and track record of high capacity factors, nuclear units are likely beneficiaries of the incentive payments. Exelon Generation Co. LLC (BBB/Stable) and PSEG Power LLC (BBB+/Stable) stand to benefit the most, in Fitch's opinion, given the size and quality of their nuclear fleet in the PJM zone. Fitch also expects FirstEnergy Generation LLC (subsidiary of FirstEnergy Corp) and AEP Generation Resources Inc. (subsidiary of American Electric Power Company Inc.) to be net beneficiaries of the new incentive payments with their large fleet of base and load following plants.
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