By Rich Heidorn Jr.
PJM’s Board of Managers today announced a final Capacity Performance plan that includes a more gradual transition into the new market design and increased benefits for high-performing generators than staff’s Oct. 7 proposal.
The board’s proposal will be submitted next week for Federal Energy Regulatory Commission approval. PJM hopes to receive FERC’s OK in time to begin implementing changes in May’s Base Residual Auction for delivery year 2018/19.
The board’s changes are intended to blunt criticism that PJM’s plan was overly expensive and being implemented too quickly. On Oct. 28, 14 coalitions representing more than 80 stakeholders submitted their critiques via briefing papers to the board. Eight of the groups generally opposed the proposal while six were generally supportive. (See Coalitions Make Their Cases to PJM Board.)
In a late afternoon press conference today, Executive Vice President for Markets Andy Ott said the changes would provide an “insurance policy” at a cost of about $2 to $3 per month per household when it is implemented in 2018.
“Many of the issues raised during this five-month discussion of Capacity Performance are not unique to the PJM region,” PJM CEO Terry Boston said in a letter to stakeholders outlining the board’s revisions. “PJM is modeling its approach after the ‘Pay for Performance’ capacity market design that FERC recently approved for ISO-NE, along with changes in the transition period that allow time for market participants to adapt and to lessen cost impacts. This design also allows for greater opportunities for all resources to participate in this enhanced capacity market.”
Changes Detailed
The board made the following eight changes to PJM staff’s Oct. 7 proposal, saying it would “improve the balance between the cost of infrastructure improvements and the benefits of reliability”:
- Revises the performance requirement, incentive and payment structure to one similar to that approved by FERC for ISO-NE.
Penalties (or “performance payments”) from under-performing resources will be allocated to over-performing generators, including energy-only resources that provide energy during emergencies. The change will allow intermittent resources and non-capacity resources to earn additional revenue.
- Adopts a “no excuses” approach to performance requirements except for retention of the exemption for resources following PJM scheduling and dispatch instructions.
PJM says this will ensure generators invest in maintenance and fuel security — such as obtaining dual-fuel capability — to avoid penalties. “This approach appropriately assigns performance risk to capacity suppliers who are in the best position to manage the risk,” PJM said.
- Reduces the volumes and capabilities of capacity to be procured during the 2015-2018 transition period.
“This will reduce transition costs but still maintain reliability through the transition period,” PJM said.
- Expands opportunities for intermittent resources by allowing them to submit “coupled” resource offers.
- Eliminates the multi-year pricing mechanism.
The board said it made the change based on concerns that the mechanism — intended to reduce risk for multi-year investments in the single-year market structure — could result in “pricing anomalies and perverse incentives.” The board said the issue would be addressed separately.
- Modifies cost allocation for Capacity Performance to include all “compliance hours,” defined as any period when PJM implements emergency procedures requiring implementation of demand response or the loading of emergency capacity.
PJM said the change, based on discussions with its Independent Market Monitor, would maximize market efficiency and encourage year-round DR.
- Maintains DR as a supply-side resource, for now.
PJM said it will address uncertainties over DR’s role in wholesale markets — the result of an appellate court ruling voiding federal jurisdiction over DR compensation — in a separate proceeding.
Ultimately, DR would be adapted to become a peak shaving commitment, modeled on the load side.
Limited DR would be eliminated; annual DR would be converted to a Capacity Performance product, and summer DR would be treated as Base Capacity during the transition period.
- Promises to adjust the forward load forecast to address concerns that overly bullish demand predictions had caused the RTO to procure more capacity than needed, at additional cost to consumers.
The promise is part of the proposal to eliminate the short-term resource procurement target, a 2.5% “holdback,” which the Market Monitor says can result in price distortions.
By recognizing the “recent trends and impacts of energy efficiency,” the 2.5% holdback will no longer be necessary, PJM said.
Transitional Period
The board acknowledged stakeholder concerns that it might not be possible to begin requiring enhanced performance for winter 2015/2016 due to the short time available for investment in winterization, dual-fuel capability and firm-fuel contracts.
Instead, it said it would seek to procure up to 2,500 MW of additional “base” capacity — the current product definition — for December 2015 through March 2016.
For the 2016/17 delivery year, PJM proposes an auction to procure a “transitional version” of the Capacity Performance product with lower prices and nonperformance penalties than when the transition is complete. “If a resource that already has [a capacity] commitment for the delivery year clears as Capacity Performance, the Capacity Performance commitment replaces its previous commitment,” PJM said.
This transitional version of the product would make up 60% of total capacity. For the 2017/18 delivery year, Capacity Performance would increase to 70%, while in 2018/19 and 2019/20, PJM proposes 80% of total capacity be fulfilled by the new product.
Beginning in 2020/2021, all capacity would be obtained under the Capacity Performance rules.
“During the transition, Base Capacity would retain the same rules as the current annual capacity product except that the peak performance penalty structure would replace the peak forced outage metric that is currently used,” PJM said.
