Energy auction’s signals too weak for FirstEnergy

As FirstEnergy Corp.’s investors cheered the results of a regional electricity auction Tuesday morning, the company’s reaction didn’t match their enthusiasm.

FirstEnergy’s stock price shot up more than 5 percent Tuesday — the first trading day after PJM Interconnection, a Valley Forge, Pa.-based grid operator that coordinates the flow of electricity between 13 states including Pennsylvania, announced the results of its annual capacity auction.

The yearly event is meant to ensure there’s enough electricity generation to meet projected power demand three years in advance by establishing the price of capacity payments that will be paid to generators in the future.

Capacity payments are like retainer fees. Generators and “demand response” customers who promise to be available to turn power on or off if PJM calls will receive $120 a day for each megawatt of generation they commit for 2017/2018. That’s double the price generators secured during last year’s auction, which targeted the 2016/2017 year.

The payments are made regardless of whether the resources are called upon by PJM. They’re determined three years in advance partly to give generators the certainty they need to plan and build new power plants.

“Frankly, this is the kind of price that sends the right signals to generators,” said Andrew Ott, executive vice president of markets at PJM, when the grid operator announced the news.

About 5,389 megawatts of new generation showed up in this year’s auction, with 93 percent coming from natural gas combined-cycle power plants.

But the signals weren’t strong enough for FirstEnergy, said company spokesman Doug Colafella.

“It’s better than last year,” he said. “But the reality is we still don’t believe that compensation is adequate for keeping these types of units down the road.”

Last year, FirstEnergy made the decision to deactivate its southwestern Pennsylvania Hatfield’s Ferry and Mitchell power plants after the facilities failed to clear the 2016/2017 capacity auction.

The cost to run the plants, which would need expensive upgrades to comply with environmental regulations, was too high for the low power prices and low capacity payment revenue, the company said.

This year’s prices, while a 100 percent improvement, don’t change the math for those plants or any others that FirstEnergy closed or plans to close, Mr. Colafella said.

As for building new plants, the capacity payments don’t come close to incentivizing that, he said.

The higher capacity payments will be reflected on customers’ utility bills. The money to pay generators those retainer fees comes from power purchasers such as large industrial customers, utilities and other electricity suppliers. Those costs then get passed on to consumers.

Typically, between 10 and 15 percent of a customer’s electricity bill comes from capacity payments, said Paula DuPont-Kidd, a spokeswoman for PJM.

FirstEnergy, which has a generation side of the business that makes power and a utility side that buys it, will be impacted on both fronts, said Charles Fishman, an equity analyst with Morningstar.

The company’s capacity payments — which Mr. Fishman estimates make up about 15 percent of fleet revenue — will increase, but so will its utilities’ costs.

Overall, the auction is good news for FirstEnergy, he said, but the stock price swing took Mr. Fishman by surprise.

“I guess people were just a lot more pessimistic than we were,” he said.

Anya Litvak: or 412-263-1455.

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