We expect the primary drivers of renewable expansion in PJM to be Renewable Portfolio Standards (RPS) and Clean Energy Standards (CES). These standards require a certain share of all final end-user electricity consumption to come from eligible renewable or clean-generation technologies.
Nine PJM states and the District of Columbia have implemented mandatory RPS/CES goals (see Exhibit 2). Some states have specific mandates for solar and offshore wind resources that require a specific portion of the state’s energy demand be met by those resources. Within PJM, Virginia, Maryland, and New Jersey are the states with the most aggressive approved mandates for renewables and clean energy. But there are a number of potential proposals across various PJM states that could further expand these targets in the future.
It could be challenging to meet these standards in the near- to mid-term due to various factors such as high consumer costs, siting and interconnection delays, and construction lead time limitations. However, we expect states would be able to meet a majority of these targets in the long run and project nearly 43 GW of new renewable capacity (7 GW onshore wind, 27 GW solar, and 9 GW offshore wind) to enter PJM by 2040. Based on the 2020 PJM Load Forecast Report and applying the growth rate from the last three years, we expect PJM peak demand to be around 161 GW in 2040, which implies that solar will represent 16% (including residential as well as utility-scale solar PV) of the peak demand by 2040. We anticipate such high solar penetration to shift the peak in PJM into the evening hours.
Solar reliability contribution and peak shifting
Due to the intermittent nature of many renewable resources, capacity contribution is significantly lower than nameplate capacity.
For solar resources, the capacity contribution ranges from 38% to 60%, depending on the technology type. We expect most of the new solar resources that will come online in PJM in the future will consist of a tracking panel, which has the highest capacity contribution. But this capacity contribution may change significantly as the peak shifts (see Exhibit 3).
Although one can observe from Exhibit 3 that the daily peak load shifts with increasing penetration of solar, Exhibit 4 summarizes the distribution of the top 5% load hours during the summer months to illustrate the amount of peak shifting. The current peak window of 3 p.m. to 6 p.m. does not change materially at lower penetration levels. However, with the addition of 15 GW of solar capacity, there is a shift of one hour (4 p.m. to 7 p.m.) in this peak window. With the addition of another 5 GW of solar capacity, the system peak further shifts by another hour (5 p.m. to 8 p.m.). When the additional solar capacity in the PJM system reaches 30 GW, the peak window shifts to the hours of 6 p.m. to 9 p.m.
A change in the definition of the peak window due to higher penetration of solar resources could potentially impact capacity contribution (see Exhibit 5). Based on the current solar capacity projections driven by various PJM state mandates, we expect the peak window to shift to the hours of 5 p.m. to 8 p.m. by 2040, and capacity contribution of tracking panel solar resources to decrease from 59% to 31%.
Currently, for a representative solar plant in PJM, capacity revenues are expected to contribute 58% of the total revenues in 2021 and to decrease to 34% by 2040 as the capacity contribution of solar drops. These predictions assume that all the current approved state mandates are met, and solar resources reflect 14% of the total PJM capacity mix.
On average, over the next 20 years, a representative solar plant would expect to earn 55% of its total revenues from the capacity market (assuming a flat capacity contribution of 60%). However, with declining capacity contribution over time, capacity revenues are projected to contribute only 45% of the total revenues on average over the next 20-year period (see Exhibit 6).
While we expect both the peak shifting analysis and ELCC-based approach to result in a lower capacity contribution and lower capacity revenues for solar resources, wind resources may ultimately benefit if the hours of highest reliability concern shift to be more in-line with the hours of highest resource output for wind resources.
Similarly, for energy storage resources, switching to an ELCC-based approach will likely increase their capacity contribution compared to the current construct (which requires the resource to be a 10-hour duration resource to receive the full capacity credit). Under the ELCC-based approach, a shorter-duration storage resource may provide a significant portion of the reliability benefits of a 10-hour storage resource.
Looking ahead to potential mitigation measures
Although PJM currently has a relatively small amount of solar capacity in the system, we expect this capacity to increase significantly in the future owing to state RPS and CES mandates. We also expect that most of the solar resources planning to come online in the future will incorporate a tracking panel, which generally has a higher capacity contribution in the range of 60%. But increasing penetration of solar resources will shift the system peak towards the evening hours; we expect the current peak window of 3 p.m. to 6 p.m. to change to the hours of 5 p.m. to 8 p.m. by 2040. As the peak window shifts, tracking solar resources' capacity will decline from approximately 60% to 30% by 2040.
Other types of solar resources could see a similar or even higher magnitude of decrease in their capacity contribution. Therefore, we expect capacity revenues or reliability-based revenues for solar resources to decline over time in PJM. Developers and investors should consider evaluating the potential mitigation measures such as pairing solar with storage to preserve their capacity revenues and to potentially utilize or transfer unused capacity interconnection MW rights resulting from the declining capacity contribution of solar resources. With storage getting close to 100% capacity contribution with implementation of the ELCC approach, a one-to-one capacity addition would be required to sufficiently utilize any unused capacity interconnection rights. However, if a developer or investor is potentially planning to pass solar ITC benefits to the co-located storage facility, then an increased capacity of storage would be required to make use of the leftover capacity interconnection rights. This is because of the limitation on storage operation resulting from the requirement of charging from solar (rather than the grid) to fully utilize the ITC benefits.
To learn more about this topic, explore our PJM insights.