With eye on keeping capacity auctions on track, FERC stands by PJM reserve market overhaul

The US Federal Energy Regulatory Commission has denied requests for rehearing of its November 2020 approval of PJM Interconnection's plans to overhaul its reserve market, with Chairman Richard Glick voting in favor while still disapproving of aspects of the grid operator's current market design.

The March 9 order (EL19-58) avoids upending plans for resuming the region's capacity auctions, which have not been held since 2018. It also rejects arguments from power suppliers, environmental groups and public interest advocates tied to PJM's use of historical prices for forecasts and its application of a 10% adder, an otherwise allowable component of cost for all generating resources, only in modeled offers of combustion turbine resources when forecasting energy and ancillary services dispatch and net revenues.

Glick offered in a concurring statement that although PJM's approach was "by no means perfect, it enables PJM to move forward with its long-delayed, much-needed capacity auction for the 2022-23 delivery year."

S&P Global Platts Analytics maintains that the reserve market reforms are "unlikely to have a significant impact on locational marginal prices ($1/MWh around-the-clock), but will increase ancillary service revenues materially," analyst Kieran Kemmerer said in a March 10 email.

Glick noted his dissents "at nearly every turn" as the commission, he said, "meddled" with PJM's capacity market and imposed "truly bad public policy" over the past three years. Those actions, he said, have left PJM slated to conduct in May what should be a three-year-forward auction for a delivery period beginning less than a year from the date of the auction.

"With that in mind, now is not the time to once again pull the rug out from underneath the auction for the 2022-23 delivery year," Glick said. "Furthermore, I see nothing in the record that identifies a superior alternative to PJM's proposal to use historical reserve prices as the basis for projecting future reserve revenues. Were such an alternative available, I agree that it would merit a hard look. But as it is not, we must provide PJM with the certainty it needs to finally run the upcoming auction and then, with that behind us, turn to remedying the more fundamental problems that the commission has created over the course of the last three years."

Market reforms

PJM's auction plans are tied to the reserve market proceeding, under which PJM in May 2020 received the go-ahead to implement energy price formation improvements pitched in March 2019 that use downward-sloping operating reserve demand curves in an effort to better reflect the reliability value of reserves.

Due to the impact the reserve market reforms could have on the volume of reserves procured and on the energy and ancillary services revenues earned by resources in PJM, FERC directed the grid operator to adopt a forward-looking methodology for calculating the energy and ancillary services offset — a variable PJM uses to help determine the amount and cost of capacity that must be procured in the region.

The new methodology, which uses publicly available futures prices at liquid trading hubs, will be used to calculate the net cost of new entry (CONE) in PJM's capacity market, a measure that sets the price floors for clean energy resources subject to market mitigation under PJM's minimum offer price rule.

Clements' dissent

Because the application of a 10% adder to combustion turbine offers and the use of historical reserve prices are assumptions that "feed into the net [CONE] value that affects all critical parameters of the capacity market," Commissioner Allison Clements said the commercial and operational urgency to resume capacity auctions could "not lessen our responsibility to ensure that the capacity rates that emerge from that auction are just and reasonable."

"An inflated net CONE value can lead to artificially high capacity quantities and prices, results that can harm consumers," she said in a partial dissent to the March 9 order, adding that she found "insufficient evidence in the record to assuage" her concerns.

Glick, in his concurrence, said he shared Clements' concerns on net CONE but asserted that "the real problem lies with PJM's misguided choice of the reference resource to calculate net CONE, rather than in how it implemented the forward-looking E&AS offset in this proceeding."

He said PJM would be well-served to consider Clements' arguments as part of its quadrennial review of the variable resource requirement curve this spring, holding to his intent not to disrupt the upcoming auction schedule.

Commissioner Mark Christie also filed a concurring statement, expressing similar concerns about the 10% adder but not wanting to threaten or obstruct the PJM capacity market calendar for reliability reasons.