FERC Approves PJM's Capacity Performance Proposal
On June 9, 2015, the Federal Energy Regulatory Commission (FERC) issued its long-anticipated order where it conditionally accepted PJM Interconnection, LLC's proposal (PJM) to restructure its Reliability Pricing Model (RPM) capacity markets to ensure that procured capacity will perform as needed, including during emergencies (historically, defined as 30 hours/year). FERC also conditionally accepted a separate filing, under section 206, to implement the same changes into PJM’s energy markets and modify some provisions of the tariff.
As a result of the Order, for the first time, demand response, storage, energy efficiency, and intermittent resources can directly participate in the RPM as a stand-alone Capacity Performance Resource, or can aggregate their bids for combined capacity offer provided that such aggregation takes place within a Locational Delivery Area.
As PJM will rely on the capacity commitments to deploy during periods of emergency, resources are subject to a stringent penalty provision for under-performance. Conversely, credits will be offered for over-performance. All resources, including Fixed Resource Requirements, which allow an entity to meet its capacity supply obligations through long-term self-supply arrangements, will be subject to the same performance incentives and consequences for non-performance. Thus, for PJM to find a bid to be “reasonable.” the seller must assess and make a “good faith representation” that based on its assessment of capabilities, the system needs and the risks of non-performance, the resource is capable of and eligible to provide capacity
One controversial provision caused FERC Chairman Bay to dissent. PJM proposed to change its existing market power mitigation to allow sell offers to cover the seller’s expected costs of improving their resource’s performance, and perceived risks of non-performance; for units to seek a unit-specific offer cap; and for units to exceed Net CONE in their unit-specific offer cap. PJM also proposed to change its existing must-offer requirement to prevent physical withholding. FERC accepted PJM’s proposal, noting that setting the Capacity Performance Resource offer cap at Net CONE times the Balancing Ratio is reasonable, as is the unit-specific offer cap review.
However, Chairman Bay argued that PJM did not provide a sufficient cost-benefit analysis to justify the proposal. Chairman Bay stated that that the current RPM construct works reasonably well, has procured sufficient capacity for PJM, and that this past winter was not as problematic as the previous one. Chairman Bay specifically opposed several aspects of the CP proposal, including that the Non-Performance Charge and the use of Net CONE, which he believes will allow units to under-perform while still clearing and making substantial profits. Chairman Bay recommended that the Non-Performance Charge should be closer to, if not higher than, the profits received from the auction itself.
PJM must file a compliance filing by July 9, 2015, making the changes to its tariff that FERC ordered. FERC will issue another order on compliance, but with this order largely setting forth the framework of Capacity Performance, PJM will be able to proceed with the RPM auction for the 2018/2019 delivery year during the week of August 10, 2105.
For more information about FERC’s ruling and its impact on your business, please contact Energy Practice Group partner Andrew Kaplan at 617.488.8104 or akaplan@pierceatwood.com.