Another State To Use Capacity Proxy Price For SOS Auctions Due To Lack Of PJM Forward Capacity Price
March 4, 2020 Email This Story Copyright 2010-20 EnergyChoiceMatters.com
Reporting by Paul Ring • firstname.lastname@example.org
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Maryland PSC Staff, in presenting recommendations from a working group, have presented to the Commission revisions to the electricity SOS residential and Type I procurement process due to the ongoing delay of several PJM Base Residual Auctions for capacity for delivery periods beginning June 1, 2020
Specifically, Staff presented revisions to the SOS agreements to use a 'proxy price' for the time period in the SOS contracts that lack capacity price transparency at the time of the SOS auctions. Wholesale SOS suppliers would receive (or pay) a true up to the actual price once it is known
The work group also considered other options, including transferring the capacity obligation from the wholesale suppliers to the utilities during the contract periods in which capacity price is unknown at the time of the SOS auctions, essentially obligating the utilities to purchase the capacity through some other means. This latter option was ultimately rejected because the utilities did not want to fundamentally change the full-requirements service obligations managed by the wholesale suppliers since the inception of SOS in Maryland, Staff said
With parties agreeing on using a proxy price for capacity, Staff said that parties turned to discussing whether to use a proxy price of $0, or some positive price above zero. Staff noted that New Jersey has used the non-zero proxy price for its Basic Generation Service (BGS) power supply auction, while the District of Columbia used the $0 proxy price for its SOS procurement.
Under the $0 price proxy, the utilities (and ultimately, retail customers) will pay the wholesale suppliers the actual Final Zonal Net Load Price for capacity as posted by PJM after PJM’s third Incremental Auction. Under the positive price proxy, the utilities will pay the suppliers’ capacity prices for the proxy embedded in their bids plus or minus the difference between the proxy price and the actual Final Zonal Net Load Price for capacity as posted by PJM after PJM’s third Incremental Auction. Once the proxy capacity price is determined (on a $/MW-day basis), the wholesale suppliers will price the proxy on a $/MWh basis into their bids, just as it has always been. The suppliers will take on the Peak Load Contribution (PLC) risk and retail SOS sales risk in doing so. If the Final Zonal Net Load Price is higher than the proxy, then the utilities will pay the suppliers’ $/MWh price plus the $/MWd cost for the difference between the proxy and Final Zonal Net Load Price, multiplied by the supplier’s unforced capacity obligation for each day of the billing month. If the Final Zonal Net Load Price is lower than the proxy, then the utilities will pay the suppliers’ $/MWh price less the $/MWd cost for the difference between the proxy and Final Zonal Net Load Price, multiplied by the supplier’s unforced capacity obligation for each day of the billing month. In turn, for applicable contracts, suppliers will be paid or be charged monthly the difference between the Final Zonal Net Load Price and the proxy price applied to the daily UCAP obligation of the supplier. Under both the zero proxy price and non-zero proxy price, the retail customers will pay on a cents per kWh basis the cost that the utilities pay to the wholesale suppliers, and be subject to true-ups under the utilities’ normal rate adjustment processes.
Staff said that the $0 price proxy would essentially result in a pass through of capacity costs. Staff said that it would be somewhat simpler for the utilities to administer, because it is less complicated for the utilities and suppliers to invoice.
The positive price proxy leaves the suppliers with volumetric risk. For this reason, Staff recommended use of a capacity proxy price with the positive price proxy. "In Staff’s view, leaving this limited risk on the wholesale suppliers is consistent with the construct that has underlain Maryland SOS procurements since they began. The wholesale suppliers have been considered the party best equipped to evaluate market risks and incorporate those risks when crafting their bids. At the same time, the risks to which wholesale suppliers are exposed have been consciously and deliberately limited, so as to encourage robust participation in Maryland’s SOS procurements. The use of a positive price proxy would carry forward this balancing of interests," Staff said
Staff said that, to date, although some parties have indicated a mild preference for a $0 price proxy, all of the parties that have made their preferences known have consented to the use of a positive price proxy.
In terms of implementation, Staff noted that, in the New Jersey BGS process, the BPU calculated its proxy price by having the electric distribution companies use the average of the last 2 auction years multiplied by a factor of 0.9. The multiplier reduces the likelihood that the actual capacity price, once determined, would be higher than the proxy used for bidding purposes. Staff reported that the Commission’s SOS bid consultant has advised Staff that the results in New Jersey were as intended, insofar as prices remained reflective of the market and participation in the BGS was not noticeably diminished. "For the sake of simplicity and transparency, the parties recommend a comparable formula be used to calculate the proxy price to be used in Maryland’s upcoming April 2020 SOS bidding," Staff said
The Maryland SOS proxy price will be the average of the Preliminary Zonal Net Load Price resulting from the last two BRAs, multiplied by a factor of 0.9.
The SOS RFP would reflect the use of a positive proxy price by stating, in new language, "For each month in the contract term that the Zonal Net Load Price for capacity resulting from the Base Residual Auction (BRA) is unknown at the time Suppliers provide their offers in a Standard Offer Service auction pursuant to this RFP, Suppliers shall incorporate a proxy Net Load Price of $___/MW-day for capacity into their offers for providing full-requirements wholesale supply service for the Residential and Small Commercial classes. For each billing month in which the proxy price was used by the Suppliers, an additional line item on the SOS Invoice will show a supplemental capacity payment or charge. A supplemental capacity payment will be stated if the Final Zonal Net Load Price for capacity is higher than the proxy Zonal Net Load Price, and a supplemental capacity charge will be stated if the Final Net Load Price for capacity is lower than the proxy Zonal Net Load Price. The supplemental capacity payment or charge will equal the Final Zonal Net Load Price for the Utility’s PJM zone less the proxy Zonal Net Load Price, multiplied by the Seller’s unforced capacity obligation for each day of the billing month."