PJM members of all sectors have written letters to PJM’s Board of Managers urging that it direct PJM to file disparate changes to the capacity market in the wake of the critical issue fast path process (CIFP) that concluded in August with no proposals carrying the sector-weighted support of the membership.
American Municipal Power (AMP) called on the board to direct a narrower filing focused on reworking the nonperformance penalty rate generators pay should their units not meet their obligations during an emergency, as well as the corresponding annual stop loss limit, to be based on the Base Residual Auction (BRA) clearing price rather than the net cost of new entry (CONE).
AMP noted that although none of the CIFP proposals received sector-weighted support in August, the only proposal to receive a bare majority of support consisted of the changes to the nonperformance penalties. Shifting to penalties based on auction clearing prices also was endorsed by the MC in May, but was not included in a subsequent filing revising the capacity performance (CP) construct. (See FERC Approves PJM Change to Emergency Triggers.)
AMP said the August vote also showed considerable support for deeper changes to PJM’s capacity market, but also hesitation about making major changes with little time to conduct analysis and simulations to determine the potential effects.
“Many of the reforms discussed during the last five months still require more time for developing details and analyzing impacts. As AMP communicated early in the CIFP-RA process, the October 1 deadline is arbitrary and was an unnecessary impediment to developing a fully implementable set of reforms with broader support. Had more time been allotted the CIFP-RA process, stakeholders would have had adequate time to more fully understand the elements of each proposal and express their informed preferences,” the AMP letter said.
A broader consortium of power co-ops and industrial customers recommended a limited filing, followed by continued discussions with stakeholders on how to make changes to the core of the capacity market.
“The implications of those changes must be thoroughly evaluated in order for market participants, other stakeholders and this coalition in particular to understand the financial impacts on suppliers, load-serving entities and consumers. Implementation of reforms will require several capacity auctions in quick succession, and implementing these changes without fully considering their impact risks irreparable harm, and equally hasty and noncomprehensive follow-on mitigation efforts. Accordingly, additional time for consideration of all proposals is needed to ensure fair outcomes for everyone,” the letter said.
The PJM Industrial Customer Coalition (ICC) supported PJM’s proposal to increase modeling of winter risk, so long as the RTO continues to capture the reliability risks faced during the summer and the potential for electrification to exacerbate those risks. The ICC also supports the proposed expanded weather history, seasonal capacity testing requirements, adopting CP penalties and a stop-loss based on capacity prices, and requiring that generators report whether their fuel procurement contracts include firm service and potentially incorporating that into their accreditation.
Shell Energy North America argued the fast timeline for the CIFP process prevented a holistic and durable proposal from emerging and the discussion of market changes did not include full understanding of the barriers to investment in the capacity market. It stated that the forward markets have lost a significant amount of liquidity and seen a rise in the amount of risk investors take on. PJM’s proposed accreditation changes, new qualification standards for capacity resources and performance requirements would further increase market uncertainty, exacerbated by existing “regulatory uncertainty, administrative complexity and rule intervention.”
The Shell letter stated that many of the CIFP proposals would increase the administrative complexity of the capacity market and argued that future discussions should include the energy and ancillary service markets with the goal of increasing revenues from those markets to reduce reliance on the capacity market for maintaining reliability.
“Reliance on capacity markets as the primary mechanism for ensuring resource adequacy should be reduced over time as PJM transitions to a system with more intermittency. Energy and ancillary service market design enhancements can be administratively simple and transparent enough to effectively create market signals needed to address the unprecedented system changes and concomitant needs,” the letter said.
Several generators, including LS Power, J-Power and Talen Energy, submitted a letter recommending a “surgical filing” in October that includes portions of PJM’s proposal, while leaving the bulk of the capacity market intact. The recommended changes include shifting the reliability metric to expected unserved energy, a more granular hourly modeling in the reserve requirement study (RRS), seasonal capacity testing requirements, using weather history data going back to 1993 and more explicitly modeling the relationship between load patterns and weather in the RRS, fuel procurement contract reporting, and shifting the CP penalties to be based on the BRA clearing price with a corresponding market seller offer cap that reflects all capacity market risks.
The generators also recommend PJM continue to work with stakeholders to overhaul the capacity market in a way that improves transparency and replicability of market components, provides confidence that any changes will function as intended and has visibility into market risks and opportunities.
A letter from Talen Energy Marketing focused on how nonperformance penalties affected resources with long lead start times, arguing that not including an excusal for those generators unduly penalized them for operating according to the parameters included in their capacity offer.
“Shifting responsibility with respect to knowledge of the grid needs, including commitment and dispatch decisions, to generators by penalizing them during long start times, even if PJM dispatches them late or not at all, is untenable. It introduces risk that cannot be mitigated and likely will lead to the retirement of the very resources that are critical for reliability today and necessary for a reliable transition to a cleaner future,” Talen wrote to the board.
The East Kentucky Power Cooperative (EKPC) also encouraged a limited approach for any filing made in the near term, encouraging the board to revise the nonperformance penalty rate and to have resources dispatched consistent with their physical and fuel constraints. In the long term, EKPC recommended that the board direct staff to continue engaging with stakeholders to work toward a capacity model with hourly commitment.
Several environmental organizations and consumer advocates argued the cost implications the CIFP proposals would have for consumers was not adequately understood throughout the process and any filing should contain rules to protect against seller market power. It stated that PJM’s proposal includes a capacity performance quantified risk (CPQR) formula that would not include energy and ancillary service revenues, which it said would increase capacity costs without increasing reliability, would weaken the IMM’s ability to review capacity offers and would dilute the cost benefits of a seasonal capacity market with the design of the proposed demand curves.
The letter also said PJM’s proposal would not accurately reflect seasonal risk by not capturing the trend of increasing temperatures resulting from climate change and would zero out the capacity benefit of ties value by relying on a “binary, unrealistic and untested assumption” that no outside capacity will be available during critical hours.
The Organization of PJM States Inc. (OPSI) submitted a letter stating the majority of member states support PJM’s proposed changes to reliability risk modeling and increasing testing requirements for generators, which they believe would improve the ability to ensure generators that rarely are dispatched would be operational for future events such as the December 2022 winter storm.
The variability that led PJM to back away from a longer 50-year historical weather lookback displayed the sensitivity of PJM’s modeling, leading OPSI to recommend PJM justify its approach annually and develop a plan to use appropriate data selection going forward. The states opposed PJM’s proposal to retain the exemption that intermittent, storage and hybrid resources have from the requirement that generators enter the capacity market, which OPSI said raises market power concerns. Instead, the organization recommended that a future capacity market design align with all resources’ operating characteristics and require that all generation participate.
“Allowing certain exempt resources to retain Capacity Interconnection Rights will not allocate and properly ration costly and scarce transmission access rights to resources relied upon by customers to ensure reliability,” OPSI said.
American Electric Power, Dominion and Duke Energy Kentucky submitted a letter calling for a transitionary period for fixed resource requirement (FRR) entities to adjust to any new market design, arguing the potential for the changes to be effective for the 2025/26 BRA — scheduled for June 2024 — leaves them with little time to coordinate with state commissions and make necessary changes to their integrated resource plans or generation fleets.
The utilities requested the board include an expanded FRR transition mechanism of at least four delivery years and an off-ramp for new FRR entities for the first five years after they elect to go that route, maintain the physical penalty option for CP penalties and expand it to be applicable to all RPM capacity resources, and maintain the ability to net performance during a performance assessment interval. The letter also argues that any proposal should include recognition of the impact accreditation changes could have on state resource planning.
PJM’s proposed changes to resource accreditation were particularly worrisome to the utilities, which stated they could face a reduction in the rating of their resources amounting to as much as 30% with less than a year to make up for the lost capacity. Paired with PJM’s proposed changes to the penalties FRR entities could face if they fail to procure adequate capacity or do not perform during an emergency, the letter states FRR entities could face “unjust and excessive penalties” if they’re not provided with time to adjust to market changes.
“These changes, combined with the expedited nature of the CIFP-RA process, make it very difficult for FRR entities to understand what their underlying positions and obligations will be under the new construct, thus creating greater uncertainty and introducing additional risk,” the letter said.
