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Dec 31, 2015

PJM Restructures Its Capacity Market Design

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In 2015, PJM Interconnection, L.L.C. (PJM), the regional transmission organization (RTO) that coordinates the movement of wholesale electricity in all or parts of 13 states and the District of Columbia, began implementing significant reforms to its capacity market construct, as well as corresponding changes to its energy markets.  These actions were taken to ensure that committed capacity resources will perform when called upon to meet the reliability needs of the PJM region.  Since 2007, PJM’s capacity market construct, the Reliability Pricing Model (RPM), has utilized a three year forward capacity market to ensure resource adequacy at a reasonable cost through the use of an annual auction, the “Base Residual Auction,” and subsequent Incremental Auctions closer to the delivery year.
 
In filings made with the Federal Energy Regulatory Commission (FERC) in December 2014, PJM argued that its capacity market design has failed to keep pace with the level of resource commitments required, has not adequately ensured actual performance and has failed to provide adequate incentives for resource performance.  PJM argued that these flaws can threaten the reliable operation of the PJM system and force consumers to pay for capacity without receiving commensurate reliability benefits. 
 
In order to address these problems, PJM proposed a new capacity product, the “Capacity Performance Resource,” to provide greater assurance of the delivery of energy and reserves during emergency conditions.  PJM further proposed charges for poor performance, credits for superior performance and a must offer requirement for Capacity Performance Resources.

In June 2015, FERC generally approved PJM’s proposed market reforms, finding that PJM had demonstrated the need for reforms to ensure the long term reliability of electric supply in the PJM region.1 FERC’s order on PJM’s market reform proposal came a year after it approved similar reforms of the ISO New England Inc. Forward Capacity Market design.2

PJM will procure all of the region’s capacity requirements in the form of Capacity Performance Resources beginning with the 2020-21 delivery year.  As a transition to the Capacity Performance Resource product, PJM established a separate, interim capacity product with a lower performance expectation, a “Base Capacity Resource,” for the 2018-19 and 2019-20 delivery years.  For those delivery years, PJM intends to procure at least 80 percent of the region’s capacity requirement in the form of Capacity Performance Resources, with the remainder composed of Base Capacity Resources.  For delivery years 2016-17 and 2017-18, for which the Base Residual Auction has already been conducted, PJM will procure a portion of Capacity Performance Resources through two Transition Auctions. 
 

In light of the D.C. Circuit Court of Appeals’ decision in 2014 vacating FERC’s final rule on demand response compensation in wholesale energy markets,3 PJM’s proposal, as approved by FERC in the June 9 Order, did not permit demand response and other non generation resources to participate in the Transition Auctions.  In an order issued on July 22, 2015, FERC granted a request for rehearing of that aspect of the June 9 Order, finding that such exclusion is unjust, unreasonable and unduly discriminatory, and requiring PJM to allow non generation resources to participate in the Transaction Auctions if they are technically capable of providing the capacity service to be procured through those auctions.4

Capacity Performance Resource 

PJM has replaced its existing capacity products with the new Capacity Performance Resource.  The Capacity Performance Resource must be capable of sustained, predictable operation that allows the resource to be available to provide energy and reserves whenever PJM determines an emergency condition exists, but is not required to operate during all hours of a delivery year.

All annual Capacity Resources will be eligible to offer as Capacity Performance Resources unless they qualify for an exemption from PJM’s must offer requirement.  In order to offer as a Capacity Performance Resource, an External Generation Capacity Resource must demonstrate that it meets, or will meet by the start of the delivery year, the criteria for an exception to the Capacity Import Limit.

Capacity Storage Resources, Intermittent Resources, Energy Efficiency Resources and Demand Resources are permitted to submit stand alone Capacity Performance sell offers in a megawatt (MW) quantity consistent with their average expected output during peak hour periods.  In addition, Demand Resources, Energy Efficiency Resources, Capacity Storage Resources, Intermittent Resources and Environmentally Limited Resources (defined as a resource which has a limit on its run hours imposed by a federal, state or other governmental agency that will significantly limit its availability on either a temporary or long term basis) may submit aggregated offers as a Capacity Performance Resource.  Aggregated resources may either be owned by or under contract to the seller submitting the offer, including resources obtained through bilateral contract and reported to PJM through its capacity accounting system.

PJM also established, on a phased in basis, an Annual Demand Resource product to replace its existing demand response capacity products and requires that Annual Demand Resources conform with the standards applicable to a Capacity Performance Resource.  Annual Demand Resources are permitted to aggregate with other eligible resource types to submit a Capacity Performance offer.

Instead of delineating specific eligibility requirements for a Capacity Performance Resource, PJM’s proposal to FERC had included a requirement that a market seller submitting a Capacity Performance offer make a good faith representation that (i) it has made, or will make, the necessary investment to ensure that its resource has the capability to provide energy when called upon; (ii) the resource meets the operational requirements and performance obligations applicable to Capacity Performance Resources; and (iii) the seller’s offer contemplates the physical delivery of the Capacity Performance Resource no later than the commencement of the applicable delivery year.  Fossil fueled generation resources would be required to make an additional good faith representation that they have obtained and hold, or reasonably expect to obtain and hold, the contractual and other rights necessary to ensure firm fuel supply to each of their affected units during the delivery year.  FERC, however, rejected PJM’s proposed good faith representation requirement, finding it to be inappropriately vague, and could cause well performing resources to elect not to participate in the capacity market to avoid the risk of sanctions.  Among other things, FERC noted that PJM will be authorized to review Capacity Performance Resource sell offers in order to mitigate speculative participation in PJM’s capacity market.

PJM also revised its milestone requirements to obligate a planned generation resource to execute a Facilities Study Agreement in order to submit an offer into PJM’s Base Residual Auction.

Under its revised market design, PJM, in consultation with the Market Monitor, has discretion to reject a sell offer if it determines that the relevant resource does not qualify as a Capacity Resource; that is, if the resource cannot reasonably be relied on to perform, as required, during emergency conditions, is purely speculative or would otherwise undermine the intent of PJM’s Capacity Performance construct.  However, PJM may only reject an offer when a resource fails to demonstrate that it can reasonably be expected to meet Capacity Performance obligations, consistent with the resource’s offer, by the relevant delivery year.
On an interim basis, PJM will reclassify its existing capacity market product as a Base Capacity product.  Base Capacity Resources will include internal and external capacity resources; Intermittent Resources; Capacity Storage Resources; Annual Demand Resources; Base Capacity Demand Resources; and Base Capacity Efficiency Resources.  Base Capacity Resources will be permitted to participate in PJM’s capacity auctions in the 2018-19 and 2019-20 delivery years.  Summer only resources seeking to submit offers as Base Capacity Resources must demonstrate that they are, or will be, physically incapable of meeting the year round performance expected of a Capacity Performance Resource.

Market Mitigation 

Beginning with the 2018-19 delivery year, the installed capacity of every Generation Capacity Resource located in the PJM region that is capable, or that reasonably can become capable, of qualifying as a Capacity Performance Resource must be offered as a Capacity Performance Resource, subject to applicable demand equivalent forced outage rate (EFORd) and Unforced Capacity determinations, and an exceptions process.

PJM has revised its market power mitigation rules to allow for sell offers that will cover the seller’s expected new costs of improving their resources’ performance, and the perceived risks of non performance.  In its December 2014 filing with FERC, PJM had proposed a default offer cap for Capacity Performance Resources equal to Net Cost of New Entry (Net CONE).  PJM subsequently amended its proposal to provide for a default offer cap set at the product of Net CONE times the average of the Balancing Ratios in the three consecutive calendar years that precede the Base Residual Auction for the delivery year.  PJM also will allow resources with high avoidable costs to submit unit specific offer caps that detail all Avoidable Cost Rate components, including a quantifiable risk premium.  A Market Seller Offer Cap may, at the election of the seller, exceed the Net CONE default offer cap, subject to an Avoidable Cost Rate that will permit the costs of natural gas transportation, other gas service and a risk premium.  FERC approved PJM’s amended proposal, finding that “[a]ny Capacity Performance offer below the default offer cap can properly be deemed competitive, and any offer above that level will be scrutinized by the Market Monitor and PJM to ensure that it is based on legitimate costs and reasonable estimates of unit specific performance and system parameters.”

Non-Performance Charges 

PJM established a new Non Performance Charge, applicable to Capacity Performance Resources, which is based on the expected performance of each Capacity Resource, as compared to its actual performance during an Emergency Action declared by PJM.  Emergency Actions are defined as locational or system wide capacity shortages, including Voltage Reduction Warnings, Manual Load Dump Warnings, Voltage Reduction Actions and Manual Load Dump Actions, that cause pre emergency mandatory load management reductions or a more severe action.  PJM will measure Capacity Resources’ performance during Performance Assessment Hours, which will be triggered when PJM declares an Emergency Action.  The measure of expected performance and actual performance will differ based on the resource type at issue and PJM’s existing rules governing those resources.  If a Capacity Resource’s actual performance falls short of its expected performance, its shortfall will be subject to the Non Performance Charge, absent a valid excuse or the application of a stop loss limit. 
 
Capacity Performance Resources will be subject to Non Performance Charges, but will not also be subject to PJM’s Peak Season Maintenance Compliance Charge or Peak Hour Period Availability Charge.  Base Capacity Resources will be subject to a Non Performance Charge if they fail to perform under emergency conditions during the months of June through September.

PJM will base the Non Performance Charge rate on Net CONE divided by 30, the assumed number of Emergency Action hours per year.

PJM also established “stop loss” limits on the total Non Performance Charges it may assess.  In the June 9 Order, FERC accepted PJM’s proposed annual Non Performance Charge stop loss limit equal to 1.5 times annual Net CONE, but conditioned its acceptance on the elimination of PJM’s proposed monthly stop loss limit equal to 0.5 times annual Net CONE.

A Capacity Resource will be not be assessed Non Performance Charges if it was not scheduled by PJM because it was on an approved planned or maintenance outage, or was scheduled down based on PJM’s determination that such scheduling action was appropriate to the security constrained economic dispatch of the PJM region.  A Capacity Resource will be assessed Non Performance Charges if it otherwise would have been scheduled by PJM’s Office of Interconnection to perform, but was not scheduled to operate, or was scheduled down, solely due to any operating parameter limitation submitted in the resource’s offer, or the seller’s submission of a market based offer higher than its cost based offer.

PJM also has revised its tariff to limit the circumstances under which market participants are excused from performing their obligations.  Beginning with the 2018-19 delivery year, an event classified by the North American Electric Reliability Corporation (NERC) as “outside management control” will be treated as a forced outage for the purpose of calculating a forced outage rate or peak hour period penalties.

Performance Bonus Payments 

Revenue collected by PJM from payment of Non Performance Charges will be distributed, as a bonus, to resources that perform above expectations, based on the ratio of the relevant resource’s bonus performance level to the total bonus performance from all resources over the same Performance Assessment Hour.  Specifically, PJM will distribute Non Performance Credits for a Performance Assessment Hour to each Market Participant—whether or not such Market Participant committed capacity for that hour—that provided energy or load reductions above the levels expected for such resource during such hour.  Unlike the approach taken by ISO NE, PJM’s mechanism will assess performance during Emergency Actions rather than only during shortage or scarcity conditions.

Financial Security Requirements

Previously, PJM’s tariff required that sellers of certain Capacity Resources provide credit support prior to an RPM Auction equal to the product of the MW to be offered times an RPM Auction Credit Rate determined using Net CONE for the relevant delivery year.  PJM has revised the Auction Credit Rate for sellers submitting offers for a Capacity Performance Resource to be the greater of (i) 0.5 times the Net CONE for the relevant delivery year or (ii) $20/MW day times the number of days in that delivery year.
  
For the period following the posting of the Based Residual Auction Result, the Auction Credit Rate for Capacity Performance Resources will be the number of days in the delivery year times the greater of (i) $20/MW day; or (ii) 0.2 times the capacity resource clearing price (MW day); or (iii) the lesser of 0.5 times Net CONE or 1.5 times Net CONE minus the applicable capacity resource clearing price for the resource (MW day). 
 
Following posting of the Base Residual Action results, planned resources that cleared the Capacity Performance Auction are required to provide credit support equal to the greater of (i) 0.2 times the Base Residual Auction Clearing price for the Locational Deliverability Area within which the resource is located; (ii) $20/MW day; and (iii) the lesser of (a) 0.5 times Net CONE and (b) 1.5 times Net CONE minus the Base Residual Auction clearing price for the Locational Deliverability Area within which the resource is located.

For a seller seeking to offer in an Incremental Auction a Capacity Performance Resource that has not been committed previously for a delivery year, the Auction Credit Rate will be the greater of (i) 0.5 times Net CONE or (ii) $20/MW day, times the number of days in such delivery year.  The Auction Credit Rate for Capacity Performance Resources committed in the Incremental Auction will be the number of days in that delivery year times the greater of (i) 0.2 times the Incremental Auction clearing price for the relevant delivery year of $20/MW day, or (ii) the lesser of 0.5 times the Net CONE for the relevant delivery year, or 1.5 times Net CONE for the relevant delivery year minus the Incremental Auction Clear Price.
Sellers of Planned Generation Capacity Resources may incrementally reduce their credit obligations after achieving certain project development milestones and the project moves toward being placed in service.  In addition, the initial RPM Credit Requirement for resources that have secured financing or had full funding available prior to the start of the 2015 Base Residual Auction is equal to half the product of the RPM Auction Credit Rate times the MW offered and may be further reduced upon achieving certain project development milestones.

Energy Market Revisions

Operating Parameters

PJM also revised its energy market rules to require market based offers for Capacity Resources to be based on the specific physical characteristics of that resource, rather than on economic and budgetary considerations, under circumstances that would typically precede an emergency event (known as “parameter limited”).  If a resource cannot actually be operated within these more flexible parameters, then it must inform PJM of the parameters to which it is capable of being operated.  PJM’s Office of Interconnection will determine the unit specific achievable operating parameters for each individual resource on the basis of its operating design characteristics and other constraints, including the actual operational limitations of the relevant resource type.  These unit specific values will apply for the generation resource unless it is operating pursuant to an exception from those values meeting the minimum parameters. 
 
Resources may recover, through make whole payments, the costs incurred if a resource operates within its actual constraints and not only within its unit specific parameter limits based on its physical characteristics.  A resource would only be deemed ineligible for make whole payments if it operates outside any actual constraints faced by the resource, not only limitations based on the resource’s physical constraints.  A resource that operates outside of its unit specific parameter limits can seek to justify such operation to PJM as the result of actual constraints, rather than the exercise of market power.  If the resource provides adequate justification, it would be eligible for any appropriate make whole payments for that operating interval.

PJM also established a standardized start up and notification time of 24 hours or less for Capacity Performance Resources bidding into PJM’s energy markets, absent the issuance of a hot or cold weather alert.  When a weather alert has been issued, the combined notice and start up time would not be permitted to exceed 14 hours.

Force Majeure

PJM revised its Operating Agreement to include a new defined term, “Catastrophic Force Majeure,” which includes only actions or events in which there has been a systematic failure in all or substantially all of the PJM areas of either the transmission system or the fuel delivery network.  It also narrowed its existing force majeure provisions, as applicable to all market transactions, to apply only in the event of a Catastrophic Force Majeure.  Performance of any obligation arising under the Operating Agreement will not be excused or suspended because of an event of force majeure, unless the event constitutes an event of Catastrophic Force Majeure, and that event of Catastrophic Force Majeure was not caused by the member’s fault or negligence.  PJM’s broader, existing force majeure protections will continue to apply to non market, bilateral arrangements, such as interconnection service agreements.

Generator Outages

PJM has revised its energy market rules to prohibit a Generator Maintenance Outage from proceeding unless it has been submitted to PJM for approval and has been approved prior to the outage start date.  PJM may withhold approval, or withdraw a prior approval, to “ensure adequacy of reserves or the reliability of the PJM Region in connection with anticipated implementation or avoidance of Emergency procedures.”  PJM must give notice to the seller at least 72 hours prior to requiring the generator to return to normal operation.  If PJM withholds, withdraws or rescinds approval for an outage, it will work with the seller to reschedule the outage at the earliest practicable time.

With respect to Generator Planned Outages, PJM revised its rules to require a seller seeking approval for such an outage to provide PJM with an estimate of the amount of time it needs to return to service.  PJM will use this information to facilitate a voluntary solution should emergency conditions approach, or arise, that may need to return the resource to service.

Maximum Emergency Offers

PJM has revised its tariff to clarify the day ahead energy market obligation for Generation Capacity Resources.  Any capacity that is designated by a Generation Capacity Resource as a Maximum Emergency Offer and not dispatched by PJM because of its use of a Maximum Emergency Offer should be considered non performing for purposes of applying Non Performance Charges.

Status of Approval of PJM’s Market Restructuring

FERC’s June 9 and July 22 Orders are subject to rehearing and, potentially, judicial review.  In July and October 2015, PJM made filings in compliance with FERC’s June 9 and July 22 Orders, which filings currently are pending review by FERC.

In December 2015, PJM made an informational filing to inform FERC that for the 2016-2017 delivery year, which commences on June 1, 2016, PJM plans to implement its Capacity Performance rules as accepted by FERC and clarified in PJM’s compliance filings.  In order to allow PJM to make any necessary adjustments prior to June 1, PJM asked FERC to issue an order addressing the pending requests for rehearing of the June 9 and July 22 Orders as well as PJM’s compliance filings by February 1.

Transition Auctions

In 2015, PJM conducted two Transition Auctions under its new capacity market requirements.  The first, held August 26-27, procured 95,096.6 megawatts of resources at $134 per megawatt day for 60 percent of capacity needs for the 2016-2017 delivery year.The second Transition Auction, held September 3-4 to procure Capacity Performance resources for 70 percent of capacity needs for the 2017-2018 delivery year, procured 112,195 megawatts of power resources at $151.50 per megawatt day, below the offer cap.6


PJM Interconnection, L.L.C., 151 FERC ¶ 61,208 (2015), reh’g pending (the “June 9 Order”).
2 ISO New England Inc., 147 FERC ¶ 61,172 (2014), reh’g denied, 153 FERC ¶ 61,223 (2015).
3 EPSA v. FERC, 753 F.3d 216 (D.C. Cir. 2014), cert. granted, Nos. 14‑840 and 14‑841.
4 PJM Interconnection, L.L.C., et al., 152 FERC ¶ 61,064 (2015), reh’g pending (the “July 22 Order”).
5PJM News Release, “PJM Capacity Performance Transitional Auction Ensures Availability of Resource to Maintain Reliable Power Supplies for 2016‑2017,” Aug. 31, 2015.
6PJM News Release, “Second PJM Capacity Performance Transitional Auction Ensures Power Supplies for 2107‑2018,” Sept. 9, 2015.

Authors and Contributors

Donna J. Bobbish

Counsel

Project Development & Finance

+1 202 508 8089

+1 202 508 8089

Washington DC

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