Thursday, February 21, 2019

Co-ops, Munis Call for Reset of PJM Capacity Model

Dominion, Direct Energy Join Call for ‘Holistic’ Review

By Rory D. Sweeney and Rich Heidorn Jr.

The grand bargain that created PJM’s capacity market in 2007 has suffered fissures in the years since because of repeated rule changes.

Now, a coalition of cooperatives and municipal utilities says it’s time to start over.

At this week’s Markets and Reliability Committee meeting, American Municipal Power plans to propose a problem statement calling for a “holistic assessment” of the Reliability Pricing Model.

pjm capacity performanceJoining with AMP are the Delaware Municipal Electric Corp., Old Dominion Electric Cooperative, the PJM Public Power Coalition and the Public Power Association of New Jersey.

Also part of the coalition are the dominant utility in PJM’s largest vertically integrated state, Dominion Virginia Power, and retailer Direct Energy.

Although the initiative is likely to be greeted coolly by many, it has a good chance of winning the majority support needed to proceed because PJM stakeholders rarely reject problem statements.

But how AMP and its supporters would build a larger coalition to replace the RPM — or what that replacement would look like — is far from clear.

Winning approval for Tariff changes would take a two-thirds sector-weighted vote at the MRC and Members Committee. The current coalition includes 31 of 43 members of the Electric Distributors sector but only one of 13 Transmission Owners, one of 353 Other Suppliers and none of the 23 End Use Customers or 90 Generation Owners.

PJM’s public power members have long complained that they could meet their capacity needs more cheaply through self-supply than through the RTO’s capacity auctions. AMP said the restoration of public power systems’ ability to self-supply is a “minimum step to reform the capacity construct.” (See Capacity Market Attracts Praise, Criticism at FERC, “APPA, ISO-NE Spar on Capacity Markets,” NARUC 2016 Winter Meetings Briefs.)

Neither the problem statement nor the proposed issue charge suggests any broader solution.

But in a press release quoting from her comments at PJM’s Grid 20/20 conference Thursday, Lisa McAlister, AMP’s deputy general counsel for FERC/RTO affairs, outlined some options.

“PJM could still specify resource adequacy requirements for its footprint and local distribution companies of concern. The load-serving entity or electric distributor would be responsible for securing its peak load obligation plus a predetermined reserve margin and would face significant penalties absent securing the capacity,” McAlister said. “These LSEs/EDs could procure bilaterally resources on a long-term portfolio basis in compliance with a state’s resource adequacy requirements. PJM could conduct a residual auction to accommodate supply that did not enter into a long-term arrangement.”

The RPM, which took effect June 1, 2007, replaced PJM’s voluntary Capacity Credit Market, which produced less than 10% of PJM’s total capacity obligation. It was based on daily market clearing prices that were uniform across the RTO’s footprint.

The “original CCM did not include explicit market power mitigation rules, provided only weak performance incentives and did not permit the participation of demand-side resources,” according to a 2008 report by The Brattle Group. Prices were generally below the cost of adding new capacity and did not recognize the higher value of capacity in import-constrained areas in eastern PJM.

FERC ordered PJM to develop a replacement in April 2006.

The RPM, the product of more than two years of stakeholder negotiations, introduced the three-year forward auction with a downward sloping demand curve, locational pricing and included stronger performance incentives and market power protections. It allowed direct participation of demand-side resources and mandated participation by load.

More than 65 parties took part in FERC-mediated settlement discussions that resulted in the December 2006 RPM order (ER05-1410-001, et al.).

In the years since, AMP and its allies say, the RPM has proven it lacks the resilience to accommodate “unforeseen events.”

AMP counts “24 significant filings” to modify the RPM since 2010. “According to PJM, the 2016 [Base Residual Auction] was the first BRA with no rule changes from the prior year,” the problem statement says.

pjm capacity performance

The Capacity Performance model was designed to avoid the outages experienced during the polar vortex.

The new Capacity Performance construct was a reaction to the January 2014 polar vortex, when forced outages exceeded 20% and PJM nearly fell short of meeting its load. CP pays generators bonuses for fulfilling their delivery commitments when the system is stressed and charges them increased penalties when they fail to perform as agreed.

Opposed by environmentalists and demand response supporters for its phase out of summer-only resources, it’s the subject of a challenge before the D.C. Circuit Court of Appeals.

AMP says the RPM continues to be beset by threats such as the subsidies FirstEnergy and American Electric Power have sought for their money-losing plants in Ohio. EPA’s Clean Power Plan could provoke further changes, AMP says.

The proposed Ohio subsidies have spawned calls to extend the minimum offer price rule — currently applied only to new gas-fired generators entering the capacity auction — to existing units.

McAlister said that would be a mistake. “Public power does not want to be a source of increased capacity prices as a result of being considered subsidized because we have a lower cost of equity than an administratively determined reference resource,” she said.

“Capacity Performance was particularly stressful to the stakeholder community due to the inclusion of operational performance requirements, a paradigm shift for seasonal resource participation and a near complete unwind of the market mitigation rules surrounding offer caps, all of which were enacted in an expedited timeframe,” the problem statement says. “PJM needs a resource adequacy construct that is sufficiently robust to be reasonably able to withstand unforeseen exogenous events absent significant and reactionary rule change.”

The issue charge proposes that work on the overhaul be performed by a new Capacity Market Construct Restructuring Senior Task Force reporting to the MRC. The group hopes to complete the work by the end of the third quarter in 2017.

McAlister suggested the effort could be successful even if the group doesn’t win a complete overhaul.

“While the PJM stakeholder process attempts to achieve consensus, it also … provides an opportunity for minority views to be heard and ultimately enables the PJM board to be better informed as it decides how best to proceed.”

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