The PJM Interconnection LLC is seeking to ease the financial impact of between $1 billion and $2 billion in penalties for power generators that failed to perform as required during a widespread extreme weather event in December 2022.
But a Feb. 2 proposal (ER23-1038) that PJM filed with the Federal Energy Regulatory Commission drew mixed reviews from generation owners, with some power producers split over the grid operator's proposed approach to interest charges for nonperformance.
The mid-Atlantic grid operator, whose footprint covers all or part of 13 states, submitted its filing in the wake of a severe cold weather event that forced approximately 23% of PJM's generating capacity offline over the 2022 Christmas holiday weekend. PJM has not identified the units that did not perform as expected but has said that of about 46,000 MW that was not available, about 32,500 MW was gas-fired and 7,600 MW was coal-fired.
Under PJM's forward capacity market construct, generators with capacity supply obligations are subject to penalties when they underperform. Those penalties also fund a bonus pool for generators that overperform during capacity events. PJM expects to assess between $1 billion and $2 billion in charges on underperforming generators with capacity supply obligations for the 2022/2023 delivery year.
PJM seeks discretion to extend payment periods
In its Feb. 2 filing, PJM warned that its existing process for handling nonperformance charges creates "a high likelihood of member defaults."
PJM's existing rules require nonperformance charges to be invoiced and divided by the number of months remaining in the delivery year. Delivery years run from June through May of the following year. If less than three months remain in a delivery year, PJM's tariff requires nonperformance charges to be invoiced during the first month of the next delivery year.
PJM noted that the approach was originally adopted with the assumption that performance events would typically occur during the summer months, giving underperforming generators roughly nine months to repay any nonperformance charges. But the approach gives generators less time to repay nonperformance charges incurred during December cold weather events such as the 2022 winter storm.
Performance events "are themselves a function of weather conditions and other extreme events that can occur at any point during the delivery year," PJM said.
To address the risk of defaults, PJM's proposal would allow generators to have nonperformance charges for the December 2022 storm invoiced across nine monthly bills, subject to interest assessed for the months beyond May 2023.
The interest component was included in recognition that overperforming units expected to receive their full bonus payments before June.
PJM's proposal would also give it the discretion to extend the time period for invoicing future nonperformance charges by up to nine months if fewer than six monthly bills remain in the delivery year. PJM's longer-term proposal would not require interest payments.
"Adding interest payments will increase the liquidity risk of certain PJM members," PJM said.
Generators divided over approach to interest payments
Constellation Energy Corp. unit Constellation Energy Generation LLC and Vistra Corp. expressed support for PJM's short-term proposal addressing nonperformance charges incurred during the December 2022 storm. But the generation owners said PJM should include an interest component in its longer-term proposal as well.
"Including interest is a critical component because it reflects the time value of the money that overperforming market participants, who, in essence, kept the lights on in PJM, would have otherwise collected if they were not funding the extended payment period for suppliers that under-performed," Constellation said. Constellation owns and operates eight nuclear plants with 16 reactor units in the PJM region and said all 16 units ran at full capacity during the December 2022 storm.
Failure to include interest would effectively require overperforming resources to provide "an interest-free loan," Vistra added.
"Assessing interest, at the commission's modest rate, has the added benefit of encouraging market participants to manage their own credit risk and avoids the moral hazard of one group of market participants serving as a creditor to another group of market participants," Vistra said.
But two generation owners affiliated with Invenergy LLC said PJM should scrap its proposal to charge interest in its short- and longer-term proposals.
"There is not a reasoned basis to single out only nonperformance charges stemming from the Winter Storm Elliott event for different treatment and to charge interest only as to this event," the Invenergy affiliates said.
The PJM Power Providers Group, which represents generation owners in PJM, generally supported the grid operator's approach to the severe weather event, calling the estimated costs "of unprecedented magnitude."
"Electing to extend the payment period over the summer months would allow certain units that run more frequently in the summer the opportunity to recover revenues that could be used to pay the penalties," the PJM Power Providers Group said. "Further, by allowing the charges to be paid over a longer period of time, the liquidity risk of a PJM member would be reduced, and further would increase the probability of full recovery of the nonperformance charge."
PJM asked FERC to act on its filing by April 4 so that it can "address the significant liquidity issues and their potential to drive the premature retirement of units" prior to its next capacity auction set to begin June 14.
S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.