Monday, February 18, 2019

PJM Begins Campaign for ‘Fuel Security’ Payments

By Rich Heidorn Jr. and Michael Brooks

WASHINGTON — PJM on Thursday began its campaign to compensate generators based on their “fuel security,” releasing an eight-page summary of a study that showed the RTO could face outages under extreme winter weather, gas pipeline disruptions and “escalated” resource retirements.

The study, which evaluated more than 300 winter scenarios, was a “stress test … intended to discover the tipping point when the PJM system begins to be impacted,” the RTO said.

“It is clear that key elements, such as availability of non-firm gas service, oil deliverability, pipeline design, reserve level, method of dispatch and availability of demand response become increasingly important as the system comes under more stress,” it said.

PJM said it will publish a paper detailing the study in December and plans to introduce a problem statement and issue charge in the first quarter of 2019, with the filing of any proposed market rule changes with FERC in early 2020.

PJM CEO Andy Ott presents the RTO’s fuel security study at the National Press Club in D.C. | © RTO Insider

At a press conference at the National Press Building, CEO Andy Ott said the study was intended to address the concerns of governors and other policymakers about how soon the continued retirement of coal and nuclear units and the increasing reliance on natural gas could result in reliability risks.

Ott said the RTO could consider compensating fuel security through either the capacity market or as a winter reserve product in the energy market. “We feel strongly that … solutions to any dependency or any risk that we see is best done through defining it as an attribute in the markets. We think government intervention is unnecessary … it would be inefficient and more costly. We think a market solution would be best.”

RTO officials on Thursday also gave a briefing on the study during a three-and-a-half-hour special meeting of the Markets and Reliability Committee in Valley Forge, Pa., where several stakeholders urged consideration of the potential costs of the proposal. The study received forceful pushback from former PJM Chief Economist Paul Sotkiewicz, who called the RTO’s plan to offer a problem statement “premature” because the study failed to model existing market rules and operational capabilities that could address the risks, including reserve shortage pricing, industrial load reductions in response to higher prices or increased new resource entry.

“Without any showing that the market rules themselves have failed us — which there is none at this point — why would we go through a problem statement?” he said. “In fact, I can argue that [with] the market design, if allowed to work, we don’t have to worry about any of these issues.”

PJM CFO Suzanne Daugherty, who led the MRC meeting, responded that the RTO was not saying its “market rules are broken.” Ott, however, said the RTO must consider rule changes now that it has evidence that an unpriced attribute such as fuel security can affect reliability. Officials noted that 16,000 MW of the RTO’s 70,000 MW of gas-fired capacity lacks firm gas contracts. PJM’s Capacity Performance rules have encouraged such generators to maintain up to three days of fuel but don’t provide enough revenue to guarantee the two-week span envisioned in the study, Ott said.

“Hope is not a good strategic plan,” he said. “These are attributes that we depend on in [operations] and we’re not paying for them. I don’t think that’s sustainable.”

Ott also said the study would provide insights for the resilience docket FERC opened in January (AD18-7). (See Don’t Rush on Resilience, Commenters Urge.) “We really have no specific standard for this term ‘resilience’ in the industry,” Ott said. “There’s nothing in the [NERC] reliability standards that says I have to look at these scenarios today.”

FERC may say “you’re way overemphasizing these risks. … On the other hand, people could say these risks are more severe than you’re accounting for. That’s the conversation we’re going to have. We’re going to have more scenarios that we run. We’re going to have more dialogue. Our point is, engaging this conversation — getting ahead of the game — is in my opinion the prudent way to go.”

Mike Bryson, PJM vice president of operations, explains the study as CEO Andy Ott listens. | © RTO Insider

The ‘Tipping Point’

RTO officials said the study, which simulated a two-week cold spell in winter 2023/24, found that PJM would remain reliable during typical winter loads (a 50/50 peak of 134,976 MW) under both the 12,652 MW of retirements announced as of Oct. 1, 2018, and under “escalated” retirements cases.

Both escalated retirement scenarios envisioned an installed reserve margin (IRM) of 15.8%: one assumed an additional 32,216 MW of retirements by 2023, with 16,788 MW of capacity added to meet the IRM; the second assumed that no replacement capacity is added but there were an additional 15,618 MW of retirements, which reduced the IRM to 15.8%.

The RTO also remained reliable in the announced retirements case under all extreme winter load scenarios, a one-in-20 year (95/5) peak load of 147,721 MW. (PJM’s all-time winter peak load of 143,338 MW was set in 2015.)

But combining the extreme load, escalated retirements and pipeline outages resulted in numerous scenarios with voltage reductions, reserve shortages and load sheds of as much as 83 hours — about 3.5 days. The location of the outages would depend on that of the pipeline outages, PJM said.

PJM said a combination of extreme load, escalated retirements and pipeline outages resulted in numerous scenarios with voltage reductions, reserve shortages and load sheds. | PJM

What are the Odds?

RTO officials said they had not looked at the probabilities of the most severe events coinciding over a 14-day span. They are “extreme but plausible scenarios,” Ott said. “‘Extreme’ means relatively rare.”

The RTO modeled disruptions to both single, or radial, gas pipelines (up to 5,051 MW of capacity lost) and parallel or “looped” lines (up to 13,715 MW lost).

The extreme weather, medium-impact disruption assumed the loss of 50 to 100% of the pipeline capacity for five days. The extreme, high-impact break would knock out the line for five days with a 20% derating for the remaining nine days.

Oil refueling was modeled at 10 to 40 truck deliveries per day for sites larger than 100 MW and zero to 10 trucks daily for sites less than 100 MW.


The study is certain to be debated by partisans on all sides of the “fuel wars” debate that has raged since the Trump administration proposed price supports for at-risk coal and nuclear plants.

“PJM is doing the kind of analysis that other grid operators should do too,” said Michelle Bloodworth, CEO of coal lobby American Coalition for Clean Coal Energy. “PJM’s analysis shows that accelerated coal retirements could lead to periods when demand for electricity exceeds supply. This should worry electricity consumers in other parts of the country, not just in PJM.”

Renewable advocates said the study was overly narrow.

The American Council on Renewable Energy (ACORE) faulted PJM for its focus “on resource attributes rather than actual performance when it comes to providing needed reliability services.”

“A more comprehensive study would have recognized how renewable energy technologies provide a range of resiliency and reliability attributes to the grid, including flexibility, dispatchability and other essential reliability services,” said Todd Foley, ACORE’s senior vice president for policy and government affairs.

PJM “should not presuppose a fuel supply solution when other options such as transmission enhancement exist,” said Amy Farrell, senior vice president for government and public affairs for the American Wind Energy Association.

Rob Gramlich, a consultant to clean energy groups, said he was pleased to hear Ott indicate a preference for providing compensation through the energy markets. “Really what these power markets need is flexibility, and capacity markets are so crudely defined that they don’t distinguish between flexible and inflexible resources,” he said.

But he said he opposed defining the product as “fuel security.”

“What they’re saying to me is they want winter-peak energy during extreme cold scenarios. That’s a technology-neutral product. ‘Fuel-secure resource’ is not a technology-neutral product. And the difference is, things like wind, which is usually screaming hard during these situations, is providing winter-peak energy.”

Attorney Susan Bruce, who represents the PJM Industrial Customer Coalition, echoed Sotkiewicz’s concern that the study did not account for how industrial customers might reduce demand under the high LMPs that would result under the most stressed scenarios. She said PJM also should consider stakeholders’ “broader conversations about energy price formation.”

Sotkiewicz, who now heads E-cubed Policy Associates, complained that PJM had “stacked” the analysis by using economics to predict generation retirements while ignoring the economics of how the market would replace them.

He cited the wave of coal retirements PJM experienced several years ago after EPA’s Mercury and Air Toxics Standards rule went into effect.

“That turned into an absolute non-event for PJM because of all the new entry that came in through various quarters, whether it was demand response or energy efficiency or new combined cycle gas,” he said. “I’m afraid you’re going to have people with certain agendas taking these results for their own purposes and saying the sky is falling.”

PJM’s Daugherty acknowledged that risk. “We’re trying to make sure as hard as we can [that] the facts of what we did are out there,” she said. “We do recognize … that different pieces of the information could be taken out of context by folks if they choose to do so.”

Next Steps

PJM will continue discussion of the study at a special MRC conference call Nov. 26, and a special MRC in-person meeting Dec. 20.

The RTO also will develop a “frequently asked questions” document. Questions should be sent to