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Court partially remands FERC's approval of changes to PJM capacity market curve


Upholds PJM's use of combustion turbine as reference resource

Remands to FERC PJM's inclusion of an optional 10% adder

  • Author
  • Zack Hale    S&P Global Market Intelligence
  • Editor
  • Christopher Newkumet
  • Commodity
  • Natural Gas

The Federal Energy Regulatory Commission acted reasonably in approving a greenfield gas-fired combustion turbine as a reference resource to set the demand curve in future PJM Interconnection capacity market auctions, a federal appeals court ruled July 9.

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However, the DC Circuit Court of Appeals found that FERC failed to justify its approval of PJM's inclusion of a 10% adder in its revenue estimate for those resources and remanded that decision for further consideration.

At issue are changes to the administratively set demand curve — known as the variable resource requirement (VRR) curve — that PJM uses to ensure enough power supplies are procured in its multi-billion-dollar capacity auctions, held annually three years in advance of when those supplies will be needed.

Following a quadrennial review, PJM in October 2018 proposed a set of revisions (ER19-105) to the curve but sought to retain a greenfield gas-fired combustion turbine as the reference resource used to determine what is known as the net cost of new entry. Net CONE represents the estimated cost to build and operate a new generator in a specific area minus the revenue it could expect to earn in the energy and ancillary services market.

The reference resource determines PJM's net CONE estimate, which in turn shapes an auction's VRR curve. The intersection of the auction's supply curve, which is set by the combined bids of capacity sellers, and the demand curve ultimately produces the auction's clearing price.

Notably, PJM also proposed including an optional 10% adder that generators are allowed to include in their energy market bids in its estimate for the reference resource's energy and ancillary services revenues. The 10% adder is designed to allow generators to account for uncertainties in submitting cost-based energy market offers.

A divided FERC approved the changes in April 2019, reasoning they would produce accurate market signals that encourage appropriate capacity investment and achieve an adequate level of reliability.

Legal challenge

Consumer advocate agencies and environmental groups disagreed, however, and took FERC to court over the matter (Delaware Division of the Public Advocate, et al. v. FERC, 20-1212).

In doing so, plaintiffs argued that FERC ran afoul of its own framework for approving demand curve changes established four years earlier in a separate proceeding dealing with revisions to ISO New England's three-year-forward capacity market.

In that proceeding, FERC used three factors to assess the selection of a reference resource: whether the unit is likely to be developed in the region; whether cost and revenue estimates for the unit can be confidently developed; and whether the curve produces prices sufficient to meet reliability needs without adding unnecessary costs.

Plaintiffs also cited an analysis by the Brattle Group that showed using a combined-cycle gas-fired plant as the reference resource under various parameters would save PJM consumers approximately $140 million annually compared with a greenfield combustion turbine. They also noted that while two merchant combustion turbines were developed within the PJM footprint within the previous five years, those two facilities were built on brownfield sites to replace existing power plants.

The court's ruling

A three-judge panel for the DC Circuit was unconvinced by those arguments, however.

FERC's prior order in the ISO-NE proceeding "does not suggest that it meant to dictate factors the commission must use to assess a reference resource in every case," Judge Karen Henderson wrote for the court.

In affirming FERC's decision to approve a greenfield combustion turbine as a reference unit, Henderson also noted that energy and ancillary services revenue estimates for combined-cycle turbines are generally considered more difficult to develop than those for combustion turbines. The judge also cited Brattle's own analysis that found the selection of a combined-cycle unit as a reference resource "could result in the curve failing to meet the required reliability standards" if energy and ancillary services revenues are inaccurate.

However, the three-judge panel did side with plaintiffs' claims that a combustion turbine would become uncompetitive if it incorporated the 10% adder into its energy market offers.

In fact, PJM's own independent market monitor noted in the underlying proceeding that many gas-fired resources choose not to include the 10% adder in their offers, the panel noted.

While FERC found that utilizing the 10% adder would improve the accuracy of PJM's energy and ancillary services revenue estimate, the commission "did not, however, assess whether, or the extent to which, combustion turbine plants would utilize the 10% adder," Henderson said.

"Moreover, the commission's response to the contrary evidence can be described as little more than a hand wave," the judge added.

Noting that plaintiffs did not seek to vacate FERC's underlying order, the panel remanded it and directed the agency to reassess its approval of the 10% adder.

Joining Henderson in the decision were Judges Sri Srinivasan and Cornelia Pillard.