Insight for Industry – PJM Capacity Market Faces Continued Uncertainty
Despite ongoing efforts by PJM Interconnection (PJM) to address system reliability issues, regulatory impacts to its capacity market continue to increase uncertainty. The March 31 Federal Energy Regulatory Commission (FERC) ruling that requires PJM to provide additional information on its Capacity Performance (CP) proposal could delay its May 2015 Base Residual Auction (BRA) for Delivery Year 2018/2019, creating uncertainty over the schedule and structure of the upcoming forward capacity auction. PJM’s CP proposal – modeled after the Independent System Operator of New England (ISO-NE) Pay for Performance design – would have altered its capacity market from the 2016/2017 Delivery Year with full implementation 2020/2021.
FERC also rejected PJM’s proposed contingency measures for demand response (DR) participation in the event that the Supreme Court upholds the FERC Order 745 vacatur. PJM’s proposal would have shifted DR to load serving entities and state jurisdiction, thereby mitigating uncertainty in the case the Supreme Court upholds the decision to vacate Order 745.
PJM’s proposed change was expected to result in an uptick in the May capacity clearance prices, but PJM will now conduct the May 2015 BRA with existing DR rules, keeping DR as a supply-side product pending Order 745 decision. In the absence of a contingency plan for DR, participation in PJM’s capacity markets could decrease.
FERC Ruling Defers Action on PJM’s Capacity Performance Proposal to after May 2015 Auction
FERC’s decision to defer action on PJM’s CP proposal is a setback for PJM’s timeline to gain approval prior to its May 2015 BRA. PJM’s stop-gap DR proposal, if approved by FERC, would have moved DR from a supply-side resource to the demand-side in its RPM BRAs as agreements for wholesale load reduction by load-serving entities. This shift would consider DR as a regional system demand reduction, not as an added supply resource (the current structure). PJM’s proposal to shift DR to the demand-side would have allowed a wide range of wholesale entities to submit DR bids, from load-serving entities to electric distribution companies.
The proposal included strict performance requirements that would force DR to be available year-round for multiple consecutive days. It included high non-performance penalties with monthly and annual limitations: the monthly non-performance penalty limit was 0.5 times the net cost of new entry (CONE) times committed load reduction and the annual limit was 1.5 times net CONE times committed load reduction. Non-DR resources would not have been offered monthly and annual non-performance penalty limits, but instead would have had 12-hour per operating day penalty limits and additional penalty caps for extended outages. If implemented, the changes would have resulted in higher BRA clearing prices compared to previous auctions ($120/MW-day for the 2017/2018 BRA) due to increased performance requirements; however, clearing prices would still have remained below the net CONE value ($351.39 for the 2017/2018 BRA).
On March 31, FERC issued a notice that deemed PJM’s CP proposal “deficient” and directed the RTO to provide additional information within 30 days to process the filing. FERC outlined the following contingencies: 1) explanation on how PJM derived an appropriate competitive clearing price when no new capacity is required in the locational deliverability area (LDA); 2) additional details on a default offer cap and how it would apply to non-performance penalties, bonus payments, and opportunity costs associated with accepting capacity obligation; 3) any analyses that PJM conducted on expected performance charges and bonus payments for capacity performance resources under the CP proposal; 4) information on other approaches to develop offer caps for mitigation and mechanisms to supplement non-performance charges to better incent performance; and 5) information to understand how PJM’s proposed offer cap is consistent with ISO-NE’s methodology and how PJM’s resource expectations compare with ISO-NE’s Pay-for-Performance design.
FERC identified the similarities between ISO-NE because PJM’s CP proposal would adopt ISO-NE’s “no excuses” approach, providing a performance exception for resources not scheduled or dispatched by PJM. The proposal would require energy delivery during high-load periods when PJM enters emergency operations and eliminate out-of-management control exemptions.
To avoid a Performance Payment for under-performing resources, resources could be offset by an over-performing resource that did not have a capacity commitment. Intermittent resources or seasonal resources could utilize coupled offers — shared capacity performance commitment — to meet performance standards. To moderate risk for capacity performance resources, the proposal adopted a modified version of the ISO-NE stop-loss model, which represents an upper bound on the Performance Payment charged to a resource.
Each capacity performance resource would have to available for at least 700 hours of non-emergency operation in a Delivery Year (or above its cleared capacity megawatt amount), and there would be a CP target of 60 percent for the 2016/2017 Delivery Year and 70 percent for 2017/2018. For 2018/2019 and 2019/2020 Delivery Years, 80 percent of total capacity requirement would be CP and 20 percent Base Capacity. For 2020/2021 and beyond, 100 percent of the capacity requirement would be CP. The proposal would streamline the transition period to allow time for market participants to adapt and lessen cost impacts. The ISO-NE approach has strengthened performance incentives in the Forward Capacity Market, attracting three new power plants that will build 1,060 MW of generation to serve the region’s load.
FERC Rejection of Separate Stop-Gap Proposal Continues Uncertainty over Impacts of Order 745
In a separate ruling on March 31, the FERC rejected PJM’s proposed stop-gap provisions for DR participation in the May 2015 auction, stating that the proposal is premature pending the outcome of Order 745. Under the proposal, if the Supreme Court denies review of Order 745, PJM would adjust the amounts of capacity it procures in RPM auctions by modifying its variable resource requirement (VRR) curve to conform to qualifying commitments by wholesale entities to reduce wholesale loads in the capacity market. The modifications would enable the VRR curve to more accurately reflect the capacity PJM should procure in the RPM, reflecting the actual (reduced) load that wholesale customers want to be served, based on the RPM capacity clearing prices. PJM sought an effective date of April 1, ahead of the May 2015 BRA. It stated that if the Supreme Court grants Order 745 review before the 2015 BRA, it intends to withdraw these proposed revisions and conduct the auction under current rules.
However, FERC stated that approval of PJM’s proposal at this time would limit its options in responding to the FERC Order 745 decision. FERC also noted that PJM’s proposal introduces uncertainties that could exceed those it seeks to avoid, with regard to potential unexpected spillover effects on state programs and private sector arrangements. The CP proposal would have ultimately shifted DR to the load-serving entities and state jurisdiction, which would mitigate uncertainty in the case of an upheld Order 745 vacatur. The strict all-hours, multi-day CP availability requirements could eliminate DR from PJM’s capacity market for the 2020/2021 Delivery Year.
Commissioner Tony Clark dissented, stating that FERC was sidestepping the merits of PJM’s filing and that the regulator should provide guidance on a functional demand-side product to the betterment of the PJM markets. He argued that FERC should explore ways to transition DR from the supply-side to the demand-side where it properly belongs. Commissioner Philip Moeller opposed FERC’s deficiency notice, believing that PJM’s filing contained sufficient information for FERC to issue an order on the merits of the CP proposal ahead of the BRA. He noted that failing to act on the CP proposal – whether or not it is ultimately approved or rejected – creates market uncertainty on issues that require clarity now. Their opposition was overruled– the five-member commission requires three votes to proceed on an order.
Advanced Energy Management Alliance (AEMA), Maryland Commission, Public Interest Organizations, Illinois Commission, EMC, P3, and PPL Companies opposed PJM’s filing. AEMA asserted that the filing would result in substantial loss of DR participation in the capacity market, substantial increases in capacity prices, decreased reliability, decreased competition and harm to Curtailment Service Providers (CSPs) and their customers. Protesters also asserted that acceptance of PJM’s filing will lead to unjust and unreasonable rates. On the other hand, Exelon, Pepco Holdings Inc., American Municipal Power, Rockland, Direct Energy, America’s Natural Gas Alliance and PJM Utilities expressed support, reiterating PJM’s justification that the proposal is a temporary solution in light of uncertainty regarding FERC Order 745 decision and would enable continued DR participation in capacity markets.
While FERC rejected PJM’s DR provisions, it recently approved ISO New England’s proposal to integrate DR into its operating reserves and forward reserve market, recognizing the uncertainty surrounding FERC Order 745. On January 9, FERC approved revisions to ISO-NE’s transmission, markets and service tariff (Docket No. ER15-257-000) that fully integrate DR resources into its wholesale energy and reserve markets, effective January 12, 2015 and June 1, 2017, respectively.
This allowed the tariff rules to be in place for market participants to submit offers for the ninth forward capacity auction (FCA 9) held on February 2. Regardless of the FERC Order 745 outcome, ISO-NE’s efforts to integrate DR into its markets through defined performance and compensation measures will ensure stability for DR resource providers going forward. This stability is a positive for regional emissions, as committed (emissions-free) DR resources will replace some generation commitments in future delivery periods.
DR Has Provided Significant System Reliability Benefits for PJM Region
PJM has relied on DR as an important resource to ensure system reliability during times of peak load or extensive generator outages (Figure 1). PJM’s May 2014 auction produced an adequate amount of resources for the 2017/2018 Delivery Year. A total of 10,975 MW of DR was procured, with a significant shift to DR types that have more flexibility and a greater contribution to reliability. 1,401 MW more “annual” and 4,693 MW more “extended summer” DR cleared the auction compared to the previous auction, while “summer-only” DR declined by 7,527MW. According to PJM, the shift gives system operators more year-round flexibility in relying on DR when needed. PJM experienced the need for flexible DR during extreme weather periods in 2013/2014. On January 7, 2014, the region set a new record for overall winter peak demand at 141,846 MW.
PJM Response to FERC’s Concerns Imminent
Uncertainty will persist related to demand response’s role in wholesale electricity as a result of FERC’s rejection of PJM’s stop-gap proposal. FERC articulated that there was a lack of sufficient record to have the rules approved, particularly given the Supreme Court’s review of Order 745.
The agency has made a renewed effort to robustly and carefully develop its policies related to market concentration and market bidding, and it seems that PJM’s rush to get rules approved in advance of the May BRA was deemed rushed. PJM has stated that it will respond to FERC’s questions and requests with urgency and that it expects an expedited review that would take less than thirty days. PJM might look to recreate its proposal more similar to that of ISO-NE by shifting demand curves proposed and altering bidding processes in order to gain FERC’s approval.
Originally published by EnerKnol.
EnerKnol provides U.S. energy policy research and data services to support investment decisions across all sectors of the energy industry. Headquartered in New York City, EnerKnol is proud to be a NYC ACRE company.
