FERC last week rejected requests to change PJM’s capacity market rules to accommodate seasonal resources, saying the complainants failed to prove current market rules are unjust and unreasonable (EL17-32, EL17-36).
The order was prompted by a December 2016 complaint by Old Dominion Electric Cooperative (ODEC), Direct Energy Business and American Municipal Power and a January 2017 filing by Advanced Energy Management Alliance (AEMA) over the procurement of capacity in PJM’s Reliability Pricing Model.
ODEC asked the commission to establish a proceeding to allow seasonal resources to participate in capacity auctions. AEMA said PJM’s move to 100% Capacity Performance resources was unnecessarily costly for ratepayers, citing studies that it said proved that all of PJM’s resource adequacy risk is in the summer.
PJM adopted the CP rules — which increased bonuses for overperformance and penalties for underperformance — in response to the 2014 polar vortex, when the RTO came close to shedding load with as much as 22% of its generating fleet on forced outages.
“The core of the complaints is that because PJM is a summer-peaking system, PJM could acquire more summer capacity than winter capacity at an economic savings without sacrificing system reliability,” the commission said. The complainants pointed to PJM data that they said showed that by increasing summer requirements by about 500 MW, the RTO could replace more than 17,000 MW of annual capacity with less expensive summer resources without jeopardizing reliability.
Reasonable Accommodation
The commission ruled in 2015 that using the same capacity requirement for winter and summer was justified by deteriorating resource performance and the change in the RTO’s resource mix. Allowing non-year-round resources to continue participating in the capacity market could lead to reliability problems in non-summer months when seasonal resources are unavailable, it said. The commission said PJM had provided a reasonable accommodation by allowing storage resources, intermittent generators, demand response and energy efficiency to submit aggregated offers.
The commission’s approval of CP was backed by the D.C. Circuit Court of Appeals, which ruled that the “law provides no basis to claim the commission cannot approve uniform performance requirements simply because those requirements will be easier to satisfy for some generators than others.”
In response to the commission and D.C. Circuit rulings, the complainants provided planning studies and other evidence that they said proved that PJM could meet its resource adequacy targets more cost-effectively by tailoring its procurements to recognize seasonal variation. Summer peaks can top 150 GW, while the winter typically peaks at less than 100 GW.
Although the commission held a technical conference in April 2018 to explore the issues raised by the complaints, it said there was insufficient evidence to overturn the CP rules.
Data Limitations
FERC cited PJM’s warning that “modeling assumptions underlying the data on which complainants rely … warrant caution in interpreting the meaning of that data.”
While the RTO’s annual installed reserve margin study indicates that only a small amount of loss-of-load-expectation risk occurs in the winter, “recent operating experience suggests that such risk may in fact be higher,” FERC said.
PJM also said AEMA’s contention that an additional unit of summer-only capacity has 97% of the reliability value of an additional unit of year-round capacity was based on an incorrect premise that changing to seasonal capacity resources would not also change other modeling assumptions underlying the data.
“In light of these identified limitations in the data presented, we are not persuaded that the evidence complainants present is sufficient to show that the Capacity Performance model is no longer just and reasonable,” the commission said. “Ultimately, we are not convinced that it is necessary for PJM to abandon its single-product Capacity Performance model based upon the limited experience since the commission’s approval. As PJM argues, it deserves the opportunity to gain more experience with implementation of Capacity Performance and its rules over time to determine whether it provides performance and reliability during all seasons of the year.”
Glick Concurrence
Although the ruling was unanimous, Commissioner Richard Glick wrote a concurrence saying that “a seasonal capacity construct appears to be a more just and reasonable approach than PJM’s current one-size-fits-all” rules.
Glick said that while he agreed the complainants had not proved that the CP rules are unjust and unreasonable, “the record does, however, hint at a number of more fundamental problems with PJM’s capacity construct [that] merit a comprehensive review in PJM’s stakeholder process and, if necessary, by this commission.”
He said the evidence “underscores the difference between the reliability challenges in the summer and winter and … suggests that moving away from a uniform annual product could allow more resources to provide capacity, thereby increasing competition and promoting more efficient pricing.”
“Although the high reserve margins that help manage the summer-time peaks may also address winter concerns, they are not the most direct way to do so,” he continued. “The fact that having extra resources on the system may help manage non-peak reliability challenges does not necessarily justify PJM’s current approach or excuse it from pursuing means of addressing those challenges more directly and cost-effectively.”
Glick also pointed to the “unintended consequences” of PJM’s excess capacity.
“PJM, its stakeholders and this commission have devoted considerable time and resources to promoting proper price formation in PJM’s energy and ancillary service markets. Over-procuring capacity tends to dull those price signals, reducing, or altogether eliminating, many of the benefits of those price formation efforts.”
He also said he was troubled by “the implication of PJM’s statement that adopting a seasonal market could cause ‘premature resource retirement.’”
“PJM’s goal cannot be the protection of ‘conventional’ resources, nor should it spend its time fretting over the effects that a more efficient market design may have on the resource mix,” Glick said. “Instead, PJM should be focused on identifying the services the grid needs to remain reliable and structuring its markets to procure those services in the most efficient, technology-neutral manner possible. In any case, it is hardly ‘premature’ for a resource to retire because some other resource can more efficiently meet the needs of the market. That type of competition should be the goal of the capacity market, not a problem to be avoided.”
Glick also said excess capacity also has undermined the “underpinnings of PJM’s Capacity Performance proposal, which envisioned many penalty hours per year.”
“The commission’s recent decisions regarding PJM’s variable resource requirement curve and minimum offer price rule (MOPR) will only exacerbate that capacity glut, further reducing the chances of a Capacity Performance penalty. …
“Capacity Performance events will be even less likely after the issuance of today’s order on the operating reserve demand curve, which will result in PJM carrying reserves far in excess of its reserve requirement, further reducing the likelihood of a Capacity Performance event.” (See related story, FERC Approves PJM Reserve Market Overhaul.)
“If there is little-to-no prospect of a capacity shortfall, then it would seem correspondingly harder to justify the qualification restrictions, including the limitations on seasonal resources. I recognize that some of the capacity glut is the result of the commission’s actions, not PJM’s, and that this share may continue to grow as the consequences of the commission’s MOPR ruling play out. But that should not stop PJM from taking a hard look at whether Capacity Performance remains appropriate under current market conditions and, in particular, whether the barriers it created for seasonal resources should be removed.”
