By Rory D. Sweeney

A consensus that appeared to be coalescing for how to revise PJM’s Incremental Auction process and address replacement capacity issues seems to have dissipated.

Stakeholders had been combining ideas into joint packages, but PJM’s Jeff Bastian announced at last week’s meeting of the Incremental Auction Senior Task Force that the packages had separated back into five individual proposals.

The first proposal from PJM staff focused on giving Base Residual Auction sellers confidence that their commitment can be replaced in an IA “with little likelihood of economic loss and in fact a high likelihood of profit.”

“We changed our proposal around quite a bit as we thought through this,” Bastian said. “It’s not the objective of this package to force the Incremental Auction clearing prices toward the clearing price … but it is the intent to correct what we think are existing design flaws which force just the opposite to happen, especially when it comes to the PJM sellback of excess.”

GT Power Group’s Jeff Whitehead disagreed with PJM’s proposal to allocate excess commitment credits (ECCs) to load-serving entities.

“That logic ignores the fact that LSEs bear the risk of, and pay for, any excess capacity that underlies ECCs on behalf of their customers, and it is the terms of retail contracts with those customers that determine whether that excess capacity risk gets passed through to customers,” he said in an email to RTO Insider. “To the extent excess capacity risk is passed through by an LSE to its customers, then it follows that the proceeds associated with ECC sales should be passed through as well. If the excess capacity risk is not passed through to customers, and borne by the LSE, then it follows that the LSE would retain the proceeds of ECC sale. PJM’s proposal to not allocate ECCs to LSEs is unprecedented in that it incorrectly presumes the terms of retail contracts and deprives LSEs and their customers of the option to monetize the excess capacity for which they have paid.”

PJM argues that the current allocation system incents anyone looking to purchase replacement capacity to “hold out for a ‘better deal’ from a party that may be allocated ECC megawatts” rather than purchase PJM excess capacity during an IA.

Calpine’s David “Scarp” Scarpignato agreed with Whitehead’s argument, but pointed out that the allocations help the entire system. “When you get into individuals making decisions, that doesn’t work. It has to be a systemwide decision,” he said.

Whitehead agreed.

The Independent Market Monitor’s proposal is also focused on addressing IA clearing prices that are well below BRA clearing prices, but it differs on implementation. Both PJM and the Monitor envision just two IAs, with the RTO releasing capacity only in the final one. The current schedule has the BRA and three IAs for each delivery year. However, the Monitor would have the changes implemented with the third 2018/2019 IA, while PJM is targeting the 2021/2022 delivery year.

Direct Energy said it reintroduced its proposal based on concerns expressed at the IASTF’s last meeting. The package differs from PJM in that it puts a “collar” around the variable resource requirement (VRR) demand curve.

“With no collar, the possibility exists that all third-party suppliers sell at a price just below the BRA price, pushing any excess PJM [megawatts] out of the market,” Direct Energy’s proposal reads. “The result is that load still pays for the excess capacity and actually increases load’s scaling factors — increasing the overall cost of capacity.”

CPower’s Bruce Campbell offered a proposal “intended to maximize the benefit of Incremental Auctions to load interests with minimal changes to the current structure.” Described as “a compromise of stakeholder positions,” Campbell said it meets most of the preferences from initial polling, including maintaining three annual auctions between the BRA and the delivery year and having PJM sell excess capacity in each of them.

“My belief is that more supply will be coming from market participants than from PJM in future years. We’ve seen a lot of excess from PJM due to very high load forecasts in the BRA,” Campbell said. “I think PJM has taken substantive steps to address that, and I expect that most excess supply that’s available in Incremental Auctions will now come from market participants rather than PJM.”

The proposal offered by Gregory Pakela of DTE Energy Trading would set a different type of collar: a minimum sell offer at 50% of the BRA clearing price and a maximum at 100%. PJM would offer all its excess capacity in each of three IAs. Pakela offered research and analysis for his proposal, which led him to conclude, like Campbell, that PJM is unlikely to sell off a large quantity of commitments ever again. The corresponding reduction in sell offers will increase IA clearing prices, they say.

Scarp said the proposal neglected to account for the fact that capacity within a locational deliverability area must be replaced by other capacity in that LDA.

“PJM, I think, did a good job of addressing their sell offer, which everybody agrees is a major problem, probably the biggest problem,” Scarp said. “But there’s still other problems.”