PJM capacity market demand curve withstands scrutiny as split FERC denies rehearing

Washington — The Federal Energy Regulatory Commission stood by its April 2019 order approving changes to the demand curve used in PJM Interconnection's capacity auctions, despite assertions from critics — including a commissioner — that the new curve would perpetuate resource over-procurement and raise costs to consumers.

After its latest quadrennial review of its capacity market parameters, PJM revised its tariff to adjust the shape of the variable resource requirement curve used to clear PJM's capacity auctions and key inputs to that curve.

FERC in April 2019 approved PJM's proposed shift of the downward-sloping VRR curve, as well as updates to the turbine technology assumed for the combustion turbine (CT) peaking plant used as its reference resource, and a more than 20% reduction in PJM's estimate for the gross cost of new entry throughout PJM based on an analysis of the construction, operation and capital costs of updated information regarding the reference resource.

PJM, in an October 2018 filing (ER19-105), contended that the changes would "have the effect of significantly lowering prices on that curve at all capacity levels," compared with the demand curve used in the May 2018 auction, and were expected to "result in continued satisfaction of resource adequacy standards at a lower cost compared to retention of the current VRR curve."

In an order Thursday, FERC denied rehearing requests filed by the PJM Power Providers Group (P3), PSEG and public interest entities including the Sierra Club and consumer advocacy agencies for Delaware, Maryland, the District of Columbia and West Virginia.

Sierra Club attorney Casey Roberts tweeted Thursday that the decision protects a demand curve that "perpetuates PJM's costly and inefficient over-procurement of capacity." She continued, "Because of capacity market barriers to clean energy resources, this means more revenues for carbon-emitting resources."

The order drew a dissent from Commissioner Richard Glick who contended in a separate statement that FERC had committed "several of the cardinal sins of administrative law" because the order was "unsupported by substantial evidence, inconsistent with commission precedent, and it altogether fails to address arguments made on rehearing."

REFERENCE RESOURCE

Glick harped on the majority's approval of CT plants, rather than combined-cycle (CC) gas plants, as the reference resource, arguing that CT plant "costs are so much higher than the actual resources entering the market that it will distort PJM's entire capacity market design."

Public interest entities argued that continued use of the CT was no longer just and reasonable as CC construction had exceeded CT construction since 2014, but FERC rejected those arguments on rehearing, citing precedent that the reference resource need not be the most frequent entrant into the PJM capacity auctions.

"PJM explained that estimating a CC-based net CONE is more difficult than a CT-based net CONE because there is substantially greater risk of mis-estimating energy market revenues for a CC plant," and pointed to analysis "showing that switching to a CC-based net CONE would entail specific reliability risks, which would be exacerbated by mis-estimation risks," FERC said in Thursday's order. "Accordingly, we conclude that PJM's proposal is supported by substantial evidence, and we are not persuaded by public interest entities' arguments to the contrary."

Glick, during the commission's monthly meeting, which was held virtually due to the coronavirus pandemic, countered that "by choosing a combustion turbine, the commission's order raises the clearing price in PJM's capacity market above a just and reasonable level."

This will raise customers' rates and "lead to additional excess generating capacity in a region that has already substantially exceeded its reserve margin," putting consumers "on the hook for even more unneeded generation capacity," Glick said. Adding, "it will further exacerbate the problem with generators trying to make their money in the capacity markets, making the energy and ancillary services markets even less relevant."

'NOT FREE MARKETS'

Glick, referring to rehearing orders also issued on PJM's minimum offer price rule, contended that a theme was developing, in which "the commission seems to be overly concerned with raising prices in the capacity market and seems not concerned at all about the signals we are sending to continuously over-build beyond what is needed for a reliable grid in PJM."

Commissioner Bernard McNamee said though he voted for the order, the VRR curve demonstrated some of the general challenges associated with regulating administratively created markets.

"They are not free markets, and they require a lot of tariffs, a lot of administrative assumptions and decision making," McNamee said. "We have to recognize that these are attempts to approximate a free market, to provide opportunities for competition, but that there are administrative decisions that have to be made."