FERC has approved a PJM proposal to revise the penalty rate for resources that are unable to meet their capacity obligation due to a decrease to their accreditation after it receives a commitment in a capacity auction (ER25-2002). (See PJM Stakeholders Endorse Proposals to Rework ELCC Accreditation.) 

The change reduces the penalty rate to match the resource’s clearing price, rather than the full deficiency rate taking the greater of 120% of the clearing price or $20/MW-day. The issue was brought before stakeholders after shifts in the expected generation mix and performance data led parameters for the 2025/26 third Incremental Auction (IA) to shift toward higher winter risk. (See “Revised Incremental Auction Parameters Endorsed,” PJM MRC/MC Briefs: Jan. 23, 2025.) 

The higher deficiency rate would remain in effect for resources that cannot meet their obligation due to reductions in installed capacity (ICAP) or testing failures. 

PJM argued the approach would continue to incentivize the owners of resources with diminished accreditation to procure replacement capacity to cover their shortfall without being punitive. It also would avoid requiring consumers to pay for capacity that is not expected to be provided. 

Even without the deficiency penalty, PJM argued that market sellers still would have an incentive to procure replacement capacity at a cost equal to the clearing price plus expected capacity performance penalties for not meeting their obligation during any capacity deployments. 

“Because the capacity market clearing price is a reasonable proxy for the replacement cost of capacity, and a seller’s expected net non-performance charges will be strictly greater than zero, due to the risk of non-performance, if they fail to purchase replacement capacity, we find that a rational seller would prefer to purchase replacement capacity under PJM’s proposal,” the commission wrote in its June 17 order. 

Another package rejected by the Markets and Reliability Committee (MRC) would have frozen resources’ effective load carrying capability (ELCC) ratings and accredited unforced capacity (AUCAP) at the values used in the base residual auction (BRA), which several stakeholders argued would have put the full brunt on consumers when generators could mitigate the issue by maintaining high performance. 

Compared to the prior equivalent forced outage rate demand (EFORd) accreditation paradigm, which considered only generator performance, PJM said the shift to ELCC has widened the factors that can affect a unit’s rating to include factors beyond the owner’s control, particularly how the load forecast affects seasonal risk. It argued this creates an unhedgeable risk for market sellers that could be mitigated by creating an exception to the deficiency rate. 

The commission wrote the filing balanced the benefits of updating ELCC ratings with the latest information between IAs without penalizing resource owners for changes in accreditation that may be driven by factors beyond their control. 

“While shifts in capacity accreditation under EFORd were related to an individual unit’s performance, shifts in capacity accreditation under ELCC are driven by more complex, system-wide factors that ‘are not solely a function of such resource’s performance, and may not entirely be within the control of the capacity market seller,’” the commission wrote, citing PJM’s filing. “Moreover, prior to PJM’s transition to the ELCC methodology, sellers could elect to offer less capacity in the BRA than their full (unforced capacity) to mitigate against potential reductions in a resource’s UCAP, whereas under the ELCC methodology, a resource must offer the entirety of its accredited UCAP, which reduces a resource’s ability to mitigate against a potential shortfall due to a reduction in accredited UCAP value.” 

Christie Dissents

Dissenting on the June 17 order, Chair Mark Christie wrote that PJM’s proposal leaves little incentive for market sellers to procure replacement capacity and is emblematic of a capacity market design that is under constant repair while failing to deliver reliability at least cost. He cited a protest from the Independent Market Monitor (IMM) finding that the cost to purchase replacement capacity in the 2026/27 and following delivery years would be between $63,875/MW-year and $118,625/MW-year, while PJM analysis found that annual capacity performance penalties would be below $24,156/MW-year in 99% of the scenarios considered. 

“What’s left is a ‘penalty’ with no teeth. Without an incentive for generators to honor their capacity commitments, generators have less incentive to make the system reliable, and consumers are left with increased reliability risk in the event of an emergency,” he said. 

Christie wrote that the proposal constitutes a shifting of risk from resource owners to consumers, a dynamic he argued has presented itself repeatedly in deregulated markets. 

“This proposal is only the latest example of the endless Rube Goldberg tinkering with the minute details of the capacity market construct. This time, PJM seeks to ‘mitigate’ potential ELCC variability. Such tinkering has gone on for years and never reaches a point of stability — every ‘fix’ makes the market construct more incomprehensible (and as I have said many times, it’s an administrative construct, not a market),” he wrote. “The Federal Power Act (FPA) is, at its core, a consumer protection statute, and the principal role of this commission is to ensure consumers have reliable and affordable power. Today’s order serves neither of those purposes. On the contrary, I agree with the market monitor, that the revisions approved in today’s order — contrary to the FPA and this commission’s principal role — inappropriately impose reliability risk on consumers.” 

PJM stakeholders have formed a senior task force to evaluate several components of ELCC, with a proposal aimed at adding transparency to the process endorsed in May. The task force has shifted its focus on how the winter-skewed risk modeling behind ELCC interacts with the summer-focused capacity emergency transfer limit (CETL). (See “Stakeholders Endorse Proposal to Add Transparency to ELCC,” PJM MRC Briefs: May 21, 2025.) 

IMM Argues Proposal Undermines Reliability

The Monitor argued the proposal would reduce the incentive for market sellers to cover deficiencies resulting from accreditation changes and undermine the purpose of ELCC accreditation, which is to determine the expected reliability contribution for each resource. If resource owners do not procure replacement capacity, the Monitor said system reliability could be implicated. 

The Monitor also argued the elimination of the penalty payments would outweigh the benefit load may realize from not paying for capacity PJM determines is unlikely to be dependable.