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Direct Energy: PJM Capacity Performance "Aggregation" Proposal Flawed, Elimination of Base Capacity Could Raise Capacity Costs By Billions

Cites PJM's Embrace of More Costly "Annual" Resources Which Had Forced Outages During Polar Vortex

November 4, 2016

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

John Schultz, President of Direct Energy Business, LLC, wrote in a letter to the PJM Board of Managers that PJM's decision to adopt an "aggregation" proposal to address concerns about demand response's ability to participate in the 2020-21 capacity auction (which will only procure capacity performance resources), rather than retaining an amount of the base capacity product for an additional year as seasonal capacity issues are addressed, "will have negative impacts on resource diversity, reliability and achieving a least cost approach to maintaining reliability -- in short, unjust and unreasonable prices for capacity."

"We are writing to the Board to explain our reasons for continuing to advocate that PJM retain its Base Capacity product for 2020/2021 in spite of the fact that you have already approved PJM staff's filing of a proposal to facilitate aggregation of resources to address the same concerns that we share. We hope you will reconsider your decision," Schultz wrote on behalf of Direct Energy Business.

"From a process perspective, we are disappointed that the on-going stakeholder process was short-circuited prior to the consideration of minority positions at senior level committees. We believe that the discussion and voting outcomes at these committees would have proved useful in informing your consideration of this matter, although we understand you were apprised of our alternate proposal at the time you made your decision. Our proposal to retain the Base Capacity product received more support at the Seasonal Capacity Resource Senior Task Force than any other proposal, including PJM's aggregation proposal. Based on this level of support, Direct Energy felt it important to continue to discuss the proposal at the senior committee level, and placed it on the agenda for the next up-coming meeting. Unfortunately, a decision to support PJM's aggregation proposal was rendered by the Board before the up-coming meeting. We decided to honor the stakeholder process and continue the dialogue because we continue to believe that PJM's aggregation proposal is seriously flawed and the failure to retain the Base Capacity product will have negative impacts on resource diversity, reliability and achieving a least cost approach to maintaining reliability -- in short, unjust and unreasonable prices for capacity," Schultz wrote

"We are deeply concerned that PJM's aggregation proposal does not solve the problem we remain concerned about: retaining resources that have demonstrably delivered reliability to the grid but will go away if their only alternative is to participate as a Capacity Performance resource. To some degree, we feel this is 'deja vu all over again,' reminiscent of PJM's development of the PRD [price responsive demand] product. With PRD, a significant amount of time and effort was put into developing the PRD product, despite the fact that most stakeholders did not believe the product would be viable, and indeed, their belief was absolutely correct. As you are probably aware, most resources that are supposed to benefit from the aggregation proposal do not believe it is workable, nor do they believe it properly recognizes the capacity and reliability value of their resources. Only those market participants that would benefit if there were fewer resources in the market have supported aggregation. For this reason, notwithstanding the Board's decision to support an aggregation proposal, we decided to continue the discussion of retaining a Base Capacity product for one more year in order to further explore options for recognizing the capacity value/contribution of seasonal resources," Schultz wrote

"The facts are irrefutable: during the Polar Vortex, demand response and wind resources helped maintain a reliable system. PJM went so far as to praise their performance, stating 'voluntary demand response resources, while only about 20 percent of the demand response capacity, performed well' and 'PJM also saw 4,000 MWs produced by wind power ... the wind power produced had a positive impact on supply and contributed to PJM's ability to maintain reliability.' Capacity performance resources that are deemed so valuable because they are annual products nonetheless experienced forced outages during the Polar Vortex. It is simply counterintuitive that from a reliability perspective AND a least-cost resource perspective that PJM has revised its program to eliminate resources that provided a demonstrable benefit when its system was seriously stressed in favor of relying on fewer resources at higher prices, notwithstanding that some of these same resources were on forced outages during the Polar Vortex for reasons other than fuel availability," Schultz wrote

"There are a number of reasons why PJM's aggregation proposal will not work for most resources. First, it requires parties to bilaterally contract with each other. The bilateral contracts will be biased against many demand resources that are summer performing because they will have to contract with wind or hydro supply that have additional Capacity Interconnection Rights (CIRs) and thus are more likely to drive the terms of any bilateral negotiations- which will require allocation of risk, additional collateral and administrative costs, to name a few. Second, there are simply fewer winter resources available to pair up with summer resources," Schultz wrote

"PJM has a clear difference in peak load between winter and summer, with a summer peak load forecast for 2020 of 157,000 MWs and a winter peak load for 2020-2021 of 136,000 MWs. Given the 21,000 MW differential, it seems reasonable to explore alternate approaches to achieving reliability in a least cost manner- rather than pursing a construct that requires all resources to meet an annual delivery requirement, thereby creating a large surplus of resources during the winter period. We are not looking at insignificant dollars: the PJM Independent Market Monitor estimated that without the Base Capacity product the Base Residual Auction for 2019-2020 would have been $5.2 billion greater. Thus PJM is asking customers to pay more for less- relying on a smaller and less diverse set of resources with the expectation that they will perform better than they have in the past. It is simply common sense to provide resource diversity and operational flexibility to PJM during each season by allowing seasonal resources to participate in reliability programs. PJM, in the past, has recognized this, 'our future reserves will be made up of more demand response, natural gas generation, renewables and imports.' To reiterate, the converse of relying on fewer resources and paying them more money simply does not seem like the most just and reasonable, nor reliable way of assuring the reliability customers are asked to pay for," Schultz wrote

"Finally, it is important to understand that while we think it makes sense to explore ways to allow seasonal capacity resources to participate in PJM's capacity market, we are not driving to a conclusion. Rather, we are requesting that the 27,000 MWs of Base Capacity generation that cleared in the 2019-2020 delivery year not be forced to retire simply because we ran out of time to consider potential opportunities for them to participate in the capacity market, other than as an aggregated resource," Schultz wrote

"The basics of our proposal are to retain the Base Capacity product for one additional year, with the penalty rate and stop loss rate modified such that they are comparable to the Capacity Performance product, thereby aligning the performance and offer incentives of Base Capacity and Capacity Performance resources ... During this year, stakeholders and PJM staff will work together to evaluate potential opportunities to enable seasonal resources to participate in demand response," Schultz wrote

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