VALLEY FORGE, Pa. — The PJM Members Committee on Thursday approved a proposal that would sharply reduce the penalties generators pay for underperforming during emergency conditions.
The proposed tariff revisions would effectively lower the current penalty rate ($3,177/MWh) and annual stop loss ($142,952/MW-year) by changing the figures from being based on the net cost of new entry (CONE) to Base Residual Auction (BRA) clearing prices for the locational deliverability area (LDA) that the resource is located within. The shift would result in a penalty rate of $394/MWh and a stop loss of $17,744/MW-year. (See PJM MRC Endorses Proposal to Reduce Performance Penalties.)
The conditions under which PJM could declare a performance assessment interval (PAI) would also be tightened, limiting when generators can be subject to performance charges.
PJM General Counsel Chris O’Hara said the tariff revisions should be filed by the end of the month to ensure that they can be implemented for the upcoming delivery year. The changes would be in effect through the 2024/25 DY, with proponents describing it as a temporary measure to realign penalty risks while stakeholders consider a capacity market overhaul through the Critical Issue Fast Path (CIFP) process. (See PJM Stakeholders Refine CIFP Capacity Market Proposals.)
The Markets and Reliability Committee endorsed the proposal, brought by American Municipal Power (AMP), a week earlier. Director of PJM Regulatory Affairs Lynn Horning said the RTO’s Capacity Performance (CP) structure has been a proven failure and the proposed tariff changes would align penalties with the revenues received by generators.
“We do need to get to a market design with appropriate penalties,” she said.
An alternative measure only including the PAI trigger provisions was presented by Constellation Energy, but it would only have been considered by the committee if the main motion had failed. Vice President of Market Development Bill Berg said the alternative was a compromise to reduce litigation and would have preserved a strong incentive for generation owners to ensure their facilities would be able to operate during emergencies.
“We think it’s better aligned with assuring reliability,” he said. “It ensures a fundamental CP market-based approach to incentivize strong performance.”
Berg said changing the penalty structure would have impacts on reliability and predicted that the company would protest any eventual FERC filing.
According to the voting report, the strongest support for the main motion came from the Electric Distributor sector, which gave unanimous support in the sector-weighted voting. The Other Supplier and Generation Owner sectors also gave significant support, while End-Use Customers were nearly split at 59% supporting — breaking down to industrial customers supporting and consumer advocates opposing. Transmission Owners were 67% opposed.
PJM’s Adam Keech said the RTO supported changing the PAI triggers, as staff participated in the drafting of the trigger language, but he expressed concerns that reducing penalties without creating mandates to ensure generator performance would undermine the logic of CP: to receive performance through incentives rather than hard requirements.
Heather Svenson, RTO strategy manager for Public Service Enterprise Group, said the proposal would use clearing prices in LDAs to determine penalties for generators in those regions but distribute the bonuses across the RTO. That arrangement could create significant imbalances between the penalty risk and bonuses a generator could receive, she said.
“There’s going to be an inherent mismatch between bonus and penalties,” she said.
PJM’s Stu Bresler said a similar arrangement exists today with the difference between CONE areas, but those regions have closer values than the current spread between LDAs and the Rest-of-RTO region.
Gregory Poulos, executive director of the Consumer Advocates of the PJM States (CAPS), said some advocates were opposing the changes based on a belief that they would prioritize the preservation of existing generators, even if they are not meeting their capacity obligations.
Denise Foster Cronin of the East Kentucky Power Cooperative supported the proposal, saying it would align the penalties with the revenues received by generators.
Alex Stern of Exelon said changing penalties for a delivery year after auctions have already been run could raise retroactive ratemaking concerns at FERC.
The Natural Resources Defense Council released a statement following the MC vote saying the proposal constitutes a bailout of underperforming generators at the expense of those that made investments to back up their capacity offers.
“The public has paid tens of billions of dollars to power plant owners for the promise of reliable service,” said Senior Advocate Tom Rutigliano. “Last winter, we found out that many of them, mostly natural gas owners, failed to prepare to deliver the power they were getting paid for. Today, those same owners have voted to let themselves off the hook if they fail again in the coming winter.”
