PJM and stakeholders laid out their initial thoughts on the structure of the in-development reliability backstop procurement as the RTO looks to meet a September target set out by the White House and all 13 member states’ governors.
During the Feb. 19 Members Committee meeting, PJM Board of Managers Chair David Mills, who is serving as interim CEO, said the board met at the White House with the National Energy Dominance Council (NEDC) to discuss the backstop. He said the council was adamant that the backstop be a one-time measure to secure the stability of the market and allow PJM to return to meeting its needs using market structures as quickly as possible. He added that the request to return to market forces was not specific to the existing Reliability Pricing Model design.
Mills said the council said the backstop should be designed to procure PJM’s capacity needs, rather than the needs of specific customers. The quantity PJM aims to purchase should be limited by the ability to bring new supply online, not the appetite for supply. Mills said council members mentioned a figure of about 12 GW during the meeting, which he took as indicative rather than a specific target to reach. He said there was clarity that existing generation should not be able to bid into the backstop.
Senior Vice President of Market Services Adam Keech said the eligibility of repowered deactivated resources will have to be considered further.
Design Workshops
While PJM is still in the process of drafting a proposal, Charles River Associates presented several designs during a Feb. 18 workshop. The firm was hired by PJM to share its expertise managing competitive procurements in other regions. Several stakeholders presented initial thoughts on how the backstop could be designed in a separate Feb. 17 workshop meeting.
The early sticking points emerging include what resources should be eligible, how much capacity should be procured and whether PJM should act as a “matchmaker” helping pair data centers with new resources or procure multiyear commitments for the expected capacity shortfall.
During the Feb. 18 workshop, PJM Senior Director of Market Design and Economics Rebecca Carroll said staff are firm on using a one-time design but are considering splitting it into two stages: one focused on shovel-ready projects already at some stage in PJM’s interconnection queue, the other a window for greenfield projects PJM doesn’t already have an “eye on” through existing planning processes. While they could be run concurrently, the second window is expected to take longer because of the additional design and engineering needed; possible time frames she mentioned are four to six months for existing projects and nine to 12 months for new submissions. She presented a working paper describing the broad strokes of how a backstop could function.
Stakeholders said having multiple backstop windows open at the same time PJM is administering capacity auctions could create opportunities for gaming. Carroll said the RTO is not considering changing the auction schedule but that it’s something for stakeholders to think about during future workshops.
PJM’s “strong preference” is for there to be demand-side participation around the amount the backstop should procure, Carroll said, adding that the RTO is not in the best position to define that quantity if the procurement does not have a bilateral approach.
“We’re trying to get to the people who have more certainty about what this load forecasting is supposed to be,” she said.
Keech said one roadblock to a bilateral design, in which PJM is a matchmaker between data centers and capacity developers, is most new resources will take five or more years to build, while projects on the demand side are much faster to construct. That difference in development timelines could make it difficult to identify a single customer for a bilateral arrangement.
PJM Senior Counsel Chen Lu said PJM plans to ask FERC for a waiver to substitute the one-time procurement for the existing backstop.
Generation Coalition Proposal
A joint proposal from independent power producers Constellation Energy, Vistra, Alpha Generation and Earthrise would trigger a reliability backstop auction (RBA) offering multiyear commitments up to 15 years.
It would be triggered when a Base Residual Auction (BRA) clears below 98% of the reliability requirement. The proposal would extend the price collar on the BRA, limiting the maximum price to about $420/MW-day.
Offers would receive the same clearing price as the BRA and would be selected with priority for shorter commitment periods and earlier commercial operation dates. The backstop would award enough commitments to meet the reliability requirement. New and reactivated resources would be eligible to submit offers, as well as generation not committed in the BRA because their offers exceed the maximum price, projects to uprate existing resources and demand response resources taking multiyear commitments.
Constellation’s Erik Heinle said a uniform clearing price between the RBA and BRA would avoid undervaluing existing resources, which could see a retirement signal if they receive a lower price than new resources. Pairing a multiyear commitment with the $420/MW-day clearing price cap would provide the incentive needed for new resources without creating price shock for consumers, he argued.
The RBA is designed to be a one-time measure to procure enough capacity for the 2028/29 auction, with the expectation that development will catch up with supply in future auctions, Heinle said.
E-Cubed Policy Associates President Paul Sotkiewicz said efforts to incorporate affordability into the backstop design are misguided and intertwine state retail issues with wholesale market design. Affordability for consumers is not in any of the FERC orders laying out the scope and responsibilities of RTOs.
“This is a state matter; we have no business addressing this,” he said.
Consumer Advocate Priorities
The consumer advocates of Pennsylvania, Delaware and Maryland presented their priorities for a backstop procurement, which center around new resources being paired with data center load.
Data centers or load-serving entities supplying them would submit buy offers by eligible new resources for terms between 10 and 20 years. New resources could include reactivated resources and uprates, but units in the process of deactivating or fuel switching would not qualify.
The backstop would be an alternative for data centers who do not bring their own generation or agree to curtailment under PJM’s proposed connect-and-manage process. Without participation in one of the three pathways, data centers would not be able to come online starting in June 2028.
Monitor Proposal
The Independent Market Monitor presented a proposal that would require data centers above 5 MW to purchase capacity through a backstop auction in which they are paired with new generation to serve their load, including the reserve margin.
While PJM would coordinate the auction, the data centers and generation owners would be counterparties to the bilateral contracts arranged by the auction. Data centers could avoid having to participate in the auction by bringing their own generation; the connect-and-manage approach would not be implemented under the Monitor’s proposal.
Monitor Joe Bowring said proposals in which PJM would be the counterparty to the capacity sellers in a backstop design would shift risk to the rest of the RTO’s load if the data centers fail to come online or use less than the forecast capacity.
“PJM should not be the counterparty of these deals and should not impose the risk of these deals to all other members,” he said.
Bowring also argued that electric distribution companies and LSEs should not be counterparties to capacity sellers for similar reasons. If the data centers fail to come online, the costs would be imposed on the other customers of the EDCs/LSEs who had nothing to do with the costs of the capacity.
Bowring said both points are fully consistent with one of the key principles advanced by the NEDC and the governors of PJM states: The costs resulting from the addition of data center load should be paid by the data centers themselves. Bowring asserted that the Monitor’s proposal is the only one that fully implements that principle.
The relatively low 5-MW threshold for being subject to the backstop is intended to prevent data centers from splitting their load into several smaller customers, Bowring said. Large loads other than data centers would not be subject to the proposal, and PJM would be able to act against data centers believed to be breaking large sites into increments smaller than 5 MW.
Several stakeholders argued the proposal would unduly discriminate against one class of consumers by focusing on the type of customer the load is for, rather than characteristics such as size.
Bowring said there has not been a large influx of other categories of large loads, leaving data centers as the drivers of the imbalance between supply and demand. He acknowledged it would be discriminatory to focus on data centers, but if they are the cause of the issue stakeholders are focused on, it should be considered due discrimination.
“For better or worse, data centers are the cause of the problem,” he said. The Monitor has documented the impacts of data centers on PJM markets and found data centers have added $23 billion to the costs of capacity over the past three BRAs.
Amazon Proposal
A proposal from Amazon Web Services, Talen Energy and Competitive Power Ventures would create a pay-as-bid procurement in which participants would submit offers to supply capacity to PJM for 15-year terms to meet the shortfall in the 2028/29 BRA plus the expected amount the RTO expects to be short in the subsequent auction.
Bid selection would be based on when the project could enter service and the price, weighted 75% in favor of the former. The bid price would be capped at 25% above the RTO-wide net cost of new entry, though higher offers would be allowed with Monitor evaluation while the bidding window is open.
PJM would conduct expedited network impact studies for submitted projects, and the price and construction time for transmission upgrades identified would be accounted for in the bid evaluation.
Projects that do not come into service by their commercial operation date would forgo capacity payments for that delivery year and face penalties if the cause was within the developer’s control. The resources would be subject to Capacity Performance penalties if they did not meet their obligations during emergency conditions, although the penalty rate would be based on the bid price they were awarded rather than the BRA clearing price.
The procurement costs would be allocated to the relevant LSE for large loads, leaving it up to state regulators to determine how they are accounted for in consumer rates.
