PJM’s Market Implementation Committee endorsed by acclamation a PJM proposal to revise two financial inputs to the quadrennial review to reflect changing market conditions, particularly increased interest rates. The most recent review was approved by FERC in February 2022. (See FERC Approves PJM Quadrennial Review.)
The proposal would increase the after-tax weighted average cost of capital (ATWACC) from 8.85% to 10% and use a 0% bonus depreciation rate for the 2027/28 delivery year and beyond. The original quadrennial review included a 20% bonus depreciation value for the 2026/27 year. The proposal also updated the Bureau of Labor and Statistics (BLS) indices used in capital cost escalation rates.
The changes increase values for all five CONE areas by an average of $79/MW-day, with CONE Area 5 seeing the largest increase at $90/MW-day and Area 4 increasing by $65/MW-day. The proposal is slated to go before the Markets and Reliability Committee and Members Committee on Aug. 21, with a targeted filing date at FERC in August or September.
PJM’s Skyler Marzewski said the automatic ATWACC adjustment was considered by staff and the Brattle Group — which was hired as a consultant for both the original quadrennial review and the re-evaluation of the financial parameters; however, it was determined that would provide minimal benefit, particularly if the review period is shortened to occur more often than every four years.
Paul Sotkiewicz, president of E-cubed Policy Associates, said the changes improve the accuracy of the values for the 2027/28 delivery year but that the net CONE for the previous year remains “unrealistically low,” particularly since no merchant combined cycle generators have been financed in the past two years. The most recent quadrennial review included shifting the reference resource from a combustion turbine to a combined cycle unit.
Marzewski said PJM opted against reopening those values, since doing so likely would require altering the Base Residual Auction (BRA) schedule. Sotkiewicz responded that proper price formation with the right cost of capital shouldn’t be sacrificed for timing and maintaining the auction timeline.
PJM Presents Road Map of Market Design Changes
PJM outlined its expected timeline for several ongoing stakeholder processes and staff efforts to redesign several areas of the RTO’s markets to address reliability issues identified in its Ensuring a Reliable Energy Transition analyses. PJM’s February 2023 4R’s Report was part of that analysis and laid out many of the reliability concerns the road map focuses on. (See “PJM White Paper Expounds Reliability Concerns,” PJM Board Initiates Fast-track Process to Address Reliability.)
PJM Senior Director of Market Design Rebecca Carroll said the road map was created to track the various working areas and ensure that none fall through the cracks. It is meant to be a “living document” that will be updated as new efforts begin or are completed, she said.
Efforts already underway include the demand response performance window and accreditation, reserve performance and procurement during periods of operational uncertainty, load flexibility, regulation market signals and performance requirements, and FERC Order 841 requirements on electric storage market participation. The second phase of PJM’s capacity market redesign is expected to begin in the second half of 2024 and continue through 2027.
The timelines on which work is expected to begin and be complete for each item are based on stakeholder issue charges, FERC filings and estimates from software programmers.
The rules around generators with co-located load were considered as an independent item of the road map but are included in the load flexibility category, Carroll said, adding that PJM is conducting a deeper investigation this year to look at what flexibility exists for data centers and large loads.
Executive Vice President of Market Services and Strategy Stu Bresler said corresponding road maps are being created for operations and planning, with the latter being reworked to reflect FERC’s Order 1920.
Vistra’s Erik Heinle said it’s important that PJM views the road map as a living document that reflects the shifting priorities of stakeholders. He expressed surprise that the design of the market seller offer cap (MSOC) and possible over-mitigation of offers wasn’t included in the document.
“When you look at what is driving certain retirements, certainly mitigation is one,” Heinle said.
Carroll said changes to market mitigation are included in a FERC refiling PJM is preparing with several components of its Critical Issue Fast Path proposal the commission rejected in February (ER24-98). (See “PJM to Refile Portions of Rejected CIFP Proposal,” PJM MIC Briefs: June 5, 2024.)
Independent Market Monitor Joe Bowring replied there is no over-mitigation of market offers and defended the current design.
Several stakeholders expressed support for ranking the items by importance with respect to PJM’s stated reliability concerns. Carroll said PJM thinks all the issues being discussed are high-priority and time-critical, but it is valid to consider the urgency of new issues that arise in the future.
Voltus Discusses DR Market Issues
Demand response provider Voltus presented several issues related to the accreditation of DR participation in the capacity market, known as load management, focusing on capacity offers being limited by winter energy availability and how PJM’s effective load-carrying capability (ELCC) model determines availability.
Voltus Vice President of Energy Markets Emily Orvis said the company supports expanding the hours DR is available during the winter to match the growing reliability risks PJM has identified in the evening winter hours, which she said would allow DR providers to shift their customer enrollment to capture loads that match that time, rather than looking solely at their winter peak hourly consumption. The Markets and Reliability Committee in May endorsed an issue charge to consider modifying the availability of DR resources, while rejecting a quick-fix proposal to expand the winter availability window by two hours into the evening. (See “DR Availability Issue Charge Approved, Quick Fix Proposal Rejected,” PJM MRC Briefs: May 22, 2024.)
She said PJM’s practice of capping availability to the lesser of a facility’s winter peak load or peak load contribution (PLC) limits the participation of winter-leaning customers who could provide higher curtailment during that season.
Additionally, some customers are able to reduce output to a greater degree than their winter peak load or PLC, but that additional capability is not included in the resource’s accreditation. She said Voltus’ energy availability in June 2024 was 25 to 30% higher than its accredited value.
Resources also are capped by an ELCC modeling approach that assumes that DR availability is proportional to system load, reducing the incentive for customers with flat load profiles to participate. Rather than looking to simulated system loads relative to peak forecasts, she said PJM’s DR Hub holds more accurate information about the ability for a resource to reduce its output at a given hour.
The caps to DR availability create multiple de-rates to resource accreditation that do not align with the incentives for customers to participate in the capacity market in a way that reflects PJM’s shifting view of when system risks are concentrated.
Bowring noted that he disagreed with each of the key points made by Voltus and requested an opportunity to provide education at a future meeting.
Manual Revisions Include ARR Trading Deadline
PJM’s Emmy Messina presented several revisions to Manual 6, including administrative changes and adding a deadline for auction revenue right (ARR) trades. The changes were drafted through the document’s periodic review.
Requiring ARR trades to be submitted by noon ET on the business day before the auction opens allows time for PJM to complete its necessary analysis. Relinquish requests would have a deadline of noon on the business day before the opening of stage 2 of the annual ARR allocation process.
The revisions also would disqualify transmission customers with firm services to charge energy storage or hybrid resources from receiving an allocation of ARRs. The language conforms with FERC orders in ER19-469 and ER22-1420. (See RTOs Move Closer to Full Order 841 Implementation.)
