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PJM Revises Transition Period in Final Capacity Performance Design To Be Filed With FERC, Will Rely on RMR-Type Contracts in Short-Term

December 4, 2014

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Copyright 2010-14 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

PJM informed stakeholders that its board has authorized the filing of a capacity performance proposal with FERC, though the Board has made several changes to the PJM Staff's proposal, including revisions to the transition period.

Most notably, for the 2015/16 winter, the transition mechanism will feature a procurement of 2,500 MW of resources under a, "reliability-must-run type mechanism." This is notable because, among other reasons, several states and utilities make RMR contracts a responsibility of the distribution utilities for all customers, both shopping and non-shopping, and thus in such service areas, retail suppliers would not be responsible for the new transition costs (as they would be under a transition mechanism which increases the costs of capacity itself, as later years will do).

Specifically, in the proposal to be filed with FERC, PJM acknowledges stakeholder comments that it may not be feasible to begin implementing the transition to Capacity Performance in 2015/2016 due to the short time available for investment in winterization, dual-fuel capability, firm fuel contracts, etc.

In order to reduce transitional costs and to recognize the short time-window for investment, PJM proposes to conduct a procurement process for resources that are not currently committed for the 2015/16 winter. This targeted procurement will seek to procure up to 2,500 MW of additional Capacity Resources for the winter season (December 2015 – March 2016) under a reliability-must-run type mechanism.

In contrast, PJM proposes to hold incremental auctions for the new Capacity Performance product for the 2016/2017 and 2017/2018 delivery years (with slightly altered requirements versus the final performance standards), rather than relying on the RMR solution proposed for 2015/16.

For 2016/2017, the incremental auction process will establish the amount of the Capacity Performance product targeted to be procured at 60 percent of the reliability requirement with a price cap of 0.5 times the RTO Net Cost of New Entry. Resource offers will be capped at 0.5 times RTO Net Cost of New Entry. If a resource that already has an RPM commitment for the Delivery Year clears as Capacity Performance, the Capacity Performance commitment replaces its previous commitment. Therefore, its capacity payment for the year will be the Capacity Performance clearing price instead of the previous RPM auction clearing price. The clearing price for Capacity Performance will be set by the marginal resource offers. If the target amount of Capacity Performance is not cleared, the clearing price will be capped at 0.5 times RTO Net Cost of New Entry.

For 2017/18, the incremental auction process will establish the amount of the Capacity Performance product targeted to be procured at 70 percent of the reliability requirement with a price cap of 0.6 times the RTO Net Cost of New Entry. Resource offers will be capped at 0.6 times RTO Net Cost of New Entry.

For 2018/2019 and 2019/2020, PJM proposes that 80 percent of total capacity requirements be Capacity Performance and 20 percent be Base Capacity. During the transition, Base Capacity would retain the same rules as the current annual capacity product except that the peak performance penalty structure would replace the peak forced outage metric that is currently used.

For 2020/2021 and beyond, PJM proposes that 100 percent of the capacity requirement be Capacity Performance.

Also notable is that PJM's final version of the Capacity Performance mechanism will eliminate the short-term resource procurement target, also referred to as the "2.5 percent holdback," which has held back certain demand from the base residual auction with such demand filled in the incremental auctions.

PJM said that, in order to recognize stakeholder concerns regarding the forward load forecast being consistently too high, its final proposal includes a "commitment" to adjust its load forecast to recognize the recent trends and impacts of energy efficiency, after which the 2.5 percent holdback no longer would be necessary, but further details regarding this "commitment" and the specific load forecast adjustments were not available.

Other changes in PJM's final capacity performance proposal include moving the design to more closely follow the ISO New England pay-for-performance model, with the Capacity Performance product defined as an obligation to deliver energy, if scheduled and dispatched by PJM, during Compliance Hours. Compliance Hours are the hours during the delivery year when PJM implements any emergency procedure event requiring implementation of Demand Response or the loading of emergency capacity.

Each Capacity Performance resource would be required to deliver its pro-rata share of system requirements during Compliance Hours. The resource's pro-rata share is calculated during Compliance Hours as the lesser of the resource's cleared capacity megawatt quantity times the ratio of real-time demand plus reserves divided by PJM's total quantity of cleared capacity megawatts and the resource's economic dispatch point, net of any PJM-approved outages.

If a resource delivers less than its pro-rata share of system requirements during a Compliance Hour, it will pay a Performance Payment equal to the megawatts of shortfall times the Performance Payment Rate. The Performance Payment Rate is the Net Cost of New Entry (in $/MW-year) multiplied by the number of days per year and divided by the expected number of Compliance Hours per year.

"The proposal generally adopts the 'no excuses' approach similar to ISO New England's, except that it provides a performance exception for resources not scheduled or dispatched by PJM. The proposal requires delivery of energy during high-load periods when PJM enters emergency operations. It eliminates out-of-management control exemptions," PJM said.

For more details, see the following:

Summary of Key Design Elements

Letter to PJM Members on Design Changes

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