Energy Choice
                            

Matters

Direct Energy: Customers Getting Bad Deal in PJM's Proposal To Sell Back Capacity Outside of Tariff For Pennies On The Dollar (Another Administrative Capacity Market Flaw Exposed)

January 6, 2016

Email This Story
Copyright 2010-16 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

A proposal from PJM to sell back excess amounts of capacity previously procured outside of the current tariff, "is likely to significantly harm the load interests it is designed to protect," Direct Energy Business, LLC and a coalition of industrial customers said in joint comments to FERC.

PJM has sought tariff changes at FERC to allow the release of capacity resulting from the procurement of new capacity in the Capacity Performance Transition Incremental Auctions, in the Third Incremental Auction for the 2016/2017 Delivery Year. Some 4,000 MW of excess capacity could be sold back under this proposal

"[T]he Proposal will flood PJM’s upcoming Incremental Auction with more than 4,000 MW of capacity that was over-procured relative to PJM's reliability requirements in the Transition Auctions. This will occur in addition to the significant sell-back already anticipated as a result of substantial decreases in load forecasts. The additional sell-back that PJM proposes here, which is not authorized by PJM’s current tariff, is likely to materially depress prices in the Incremental Auction and provide generators with a low-cost option to buy out of their Capacity Obligations by procuring replacement capacity at prices that have been artificially depressed through the poorly designed Transition Auction process. Under PJM’s Proposal, load likely will only realize pennies on the dollar for sold back capacity – meaning that load will pay a substantial amount of the Base Residual Auction ('BRA') price without receiving any of the corresponding benefits, as further explained below," Direct Energy and the industrials said

"PJM has not analyzed whether the minimal benefits of the proposed sell-back outweigh the energy and ancillary services benefits of retaining the excess capacity. Because PJM’s goal is to provide load with the financial benefit of the over-procured capacity, PJM’s failure to take into account overall financial impact on load renders its proposal fatally deficient. Accordingly, the Proposal should be rejected, without prejudice to refiling if and when PJM conducts an analysis demonstrating that its proposal – or a modified version of its proposal – really does benefit load," Direct Energy and the industrials said

"[W]e believe the excess non-CP Capacity Product could provide incremental reliability benefits and additional energy and ancillary services supply during the 2016/2017 Delivery Year, the value of which will far exceed that which will be realized through PJM’s Proposal. Preliminary analysis undertaken since the issue was subject to a PJM stakeholder vote suggests that the customer benefits of retaining the capacity may exceed the benefits of deeply discounted buy-out prices for the capacity," Direct Energy and the industrials said

"The fundamental problem is this: PJM is selling back the non-CP Capacity Product that was over-procured and will be paid for by load. So, for example, assume Generator X sold a non-CP Capacity Product and was paid a clearing price of $100/MW-day. In the Third Incremental Auction for the Delivery Year, the clearing price is likely to be low as explained above, so let us assume around $30/MW-day. The generator who sold the non-CP Capacity Product buys out of its commitment for 30% of the price it was paid. Load receives the $30/MW-day buy-out payment, but remains obligated to pay the clearing price of $100/MW-day to that generator, which no longer has any obligations at all for that Delivery Year. The net effect is that load continues to pay $70/MW-day while receiving nothing in return for the payment. This is the essence of PJM's proposal," Direct Energy and the industrials said

The problem is further exacerbated by expectations that the third incremental auction will be flooded with capacity, meaning any sell-back will provide load with only pennies on the dollar, Direct Energy and the industrials said

Direct Energy and the industrials noted that the over-procurement results from the hastily implemented transition auction mechanism, with their over-pricing and over-buying which protesting LSEs and customers had warned about, but such concerns were dismissed by FERC.

"There is some unfortunate irony to this situation. For many years, Direct Energy and other load serving entities, and PJMICC and other customer representatives, have fought against measures overtly designed by PJM to (1) increase capacity prices for generation resources that had already cleared PJM auctions and committed to provide reliability to PJM customers or (2) increase the total quantity of procured capacity. We also fought specifically against the Transition Auction proposals, due to the predictable outcome of over-pricing and over-buying capacity. Now, because we lost the Transition Auction fight, we find ourselves in the unfamiliar position of being, in effect, contractual 'owners' of more than 4,000 MW of Capacity that PJM procured but for which load will pay. And now that the tables are turned – now that load is the proposed seller of a significant block of capacity – PJM has proposed a methodology likely to minimize the value of the capacity sale. This disparate treatment is unfair and unduly discriminatory," Direct Energy and the industrials said

Docket ER16-532

ADVERTISEMENT
NEW Jobs on RetailEnergyJobs.com:
• NEW! -- Channel Marketing Manager -- Retail Supplier -- Houston
• NEW! -- Marketing Assistant -- Retail Provider -- Houston
• NEW! -- Financial Controller -- Retail Supplier -- Houston
• NEW! -- Sr. Energy Analyst -- Texas
• NEW! -- Structuring Analyst -- Retail Supplier -- Houston
• NEW! -- Manager, Commercial Client Services -- Retail Supplier -- Houston/DFW
• NEW! -- Account Coordinator
• NEW! -- Customer Account Manager -- Retail Supplier