By Rich Heidorn Jr.

PJM’s Board of Managers will file a proposal this week with the Federal Energy Regulatory Commission to increase the reliability expectations of capacity resources with a “no excuses” policy that would result in larger capacity payments and higher penalties for non-performance.

The proposal will be the third revision of a plan PJM staff unveiled Aug. 20 (see PJM: New Capacity Product Needed for Reliability) and revised Oct. 7 (see Lower Penalties, More Flexibility in Revised PJM Capacity Performance Proposal).

It includes a more gradual transition into the proposed new market design and increased benefits for high-performing generators than staff’s Oct. 7 proposal. The board’s changes are intended to blunt criticism that PJM’s plan was overly expensive and being implemented too quickly.

The proposal borrows heavily from ISO-NE’s “pay-for-performance” design, which won FERC approval earlier this year. PJM officials are hopeful that the eight changes made by the board in the proposal announced last week will blunt most of the criticism.

The changes would begin to take effect for the 2016/17 delivery year with full implementation in 2020/21.

What is PJM Proposing?

The proposal includes a new product called “Capacity Performance,” which would replace the current product (renamed Base Capacity). Resources that clear the capacity auction would be required to deliver energy when scheduled and dispatched by PJM during “compliance hours,” defined as any emergency procedure event requiring implementation of demand response or the loading of emergency capacity.

Each Capacity Performance resource must offer into the day-ahead energy market and be available for at least 700 hours of non-emergency operation in the delivery year.

PJM is proposing a “no excuses” approach similar to ISO-NE’s that eliminates “out-of-management control” exemptions.

The increased risks and rewards are intended to incent generators to introduce dual-fuel capability or sign firm natural gas delivery contracts to minimize their fuel delivery risk.

Intermittent and seasonal resources could satisfy Capacity Performance requirements with “coupled offers” in which they share the responsibility with one or more other resources.

Offer parameters would be limited to physical resource limits. During Hot or Cold Weather Alerts, resource notification time would be limited to one hour.

All resources must take steps to ensure they are available for scheduling with no more than a 14-hour lead time.

Performance Obligation – Each resource is required to deliver its pro-rata share of system requirements during Compliance Hours. The resource’s pro-rata share is calculated during Compliance Hours as the lesser of the resource’s cleared capacity megawatt quantity times the ratio of real-time demand plus reserves divided by PJM’s total quantity of cleared capacity megawatts and the resource’s economic dispatch point, net of any PJM-approved outages.

What Happens to Resources that Fail to Perform?

A resource that fails to deliver its full obligation will be assessed a penalty (“Performance Payment”) equal to the shortfall (in megawatts) multiplied by the performance payment rate.

Performance Payment Rate – The Performance Payment Rate is the Net Cost of New Entry (in $/MW-year) multiplied by the number of days per year and divided by the expected number of Compliance Hours per year.

Annual penalties would be limited to 1.5 times net cost of new entry, multiplied by the resource’s committed megawatts, multiplied by the number of days per year. Monthly penalties would be limited to the annual stop-loss divided by three.

Penalties collected from under-performing resources would be allocated pro-rata to all over-performing resources in the hour, including energy-only resources that perform during compliance hours. Performance payments would not be assessed during non-emergency hours.

Generation owners with multiple plants can avoid penalties by providing energy from non-capacity resources.

How much will it Cost?

PJM says the increased performance will result in increased monthly capacity costs of about $2 to $3 per household beginning in 2018, assuming average winter and summer weather. In a year of extreme weather, officials say, it would result in net savings because the increased capacity costs will be more than offset by reduced energy costs. The program would have saved $7 billion in 2014, according to a PJM simulation.

Andy Ott, executive vice president for markets, noted that only 10% of total billings are for capacity, while 80% is energy. “Even a modest change in the energy price will offset the capacity price” increase, he said during a press conference last week.

PJM would allocate costs to load based on total compliance hours for the year and the five coincident-peak hours. The current cost allocation is based on the current five-coincident-peaks alone. The cost allocation is based on actual, measured loads.

The offer cap for Capacity Performance product offers is equal to the net CONE. If a resource desires to offer above the net CONE, its offer is subject to cost-based-offer review per the current processes if it fails the three pivotal supplier tests.

When Will it Take Effect?

PJM hopes to receive FERC’s OK in time to begin implementing changes in May’s Base Residual Auction for delivery year 2018/19. (On Nov. 28, FERC approved changes to the capacity market parameters for the May auction with minimal changes. (ER14-2940))

PJM plans to procure an additional 2,500 MW of Base Capacity for winter 2015/16 and begin soliciting Capacity Performance resources for delivery year 2016/17 (60% of total capacity) and 2017/18 (70%) through incremental auctions. Capacity Performance will be acquired through the Base Residual Auction beginning with delivery years 2018/19 (80%) and 2019/20 (80%). Capacity Performance would be 100% of resources starting with delivery year 2020/21. (See table.)

What Happens to Demand Response?

The Capacity Performance plan does not include PJM’s proposal to eliminate demand response as a supply resource. The DR proposal, outlined in an Oct. 7 white paper, would make load-serving entities responsible for incorporating DR in reduced demand estimates. (See PJM DR Cos. Confident; Reject PJM EPSA Response.)

CEO Terry Boston said PJM should delay changes in its DR rules pending the resolution of a potential Supreme Court review of the D.C. Circuit Court of Appeals’ Electric Power Supply Association ruling voiding federal jurisdiction over DR compensation. (See related story, U.S. to Seek Supreme Court Review of EPSA Ruling.)

What has been the Reaction from Stakeholders?

RTO Insider requested comment on the plan from the spokespeople for the 15 coalitions that met with the Board in November.

EnergyConnect’s Bruce Campbell, representing the Advanced Energy Management Alliance, said PJM has not allowed adequate stakeholder review for what is a “substantial redefinition of capacity.”

“We anticipate significant unintended consequences as well as substantial increased costs with no particular promise of increased reliability,” Campbell said. “We are disappointed that what should have been a measured response to poor generator performance during last winter’s polar vortex events has evolved into a major reworking of PJM’s capacity market.”

The alliance said PJM should have proposed “more focused penalties for generator non-performance during actual emergencies similar to those demand resources have always accepted.”

Other coalitions either did not respond or said they needed more time to analyze the proposal.

Rest assured, they’ll have plenty to tell FERC.