PJM "Will" Propose Voluntary Capacity Auction With Longer Commitment Period

PJM said in a FERC filing that it "will" propose a New Entry Price Adjustment (NEPA) alternative under which PJM would operate a voluntary capacity auction that would allow suppliers to submit offers to sell standardized multi-year contracts in excess of three years (ER11-2875).

Although PJM has previously discussed proposed mechanisms to support new capacity with longer commitment periods, PJM's Friday filing, regarding self-supply capacity in PJM, represents a definitive statement as to such an approach.

Specifically, PJM said that it will propose a NEPA alternative under which PJM would operate a voluntary multi-year auction that would allow suppliers to submit offers to sell standardized multi-year contracts (e.g. 5, 7, 9 years) from both existing or new entry resources, and under which buyers would submit bids to purchase long term contracts for the same standardized terms.

Such a voluntary multi-year auction would be held in advance of the Reliability Pricing Model Base Residual Auction, and any contracts that are matched through the multi-year auction could exempt the supply and demand from direct participation in the RPM Base Residual Auction.

While such a long-term auction is designed serve as an alternative to the RPM Base Residual Auction for new entry resources desiring longer term revenue guarantees, PJM said that it also could address stated concerns related to the effect of the Minimum Offer Price Rule (MOPR) on self supply capacity arrangements, "because it could create an explicit exception if the resource cleared in the multi-year auction."

"Of course, the multi-year auction would need specific rules to prohibit the exercise of buyer-side market power by submission of low-priced, paired bids and offers by a single entity," PJM said.

Public release of bid/offer spreads from the extended voluntary auction would also increase transparency and create the potential for more robust forward market activity which could enhance the effectiveness of RPM in providing investment signals to satisfy long-term resource adequacy requirements, PJM said.

Further regarding self-supply, PJM said that it was open to discussing the Fixed Resource Requirement opt-out mechanism, but that certain "fundamental" aspects are required under any FRR alternative. State regulators and load serving entities have argued that the FRR alternative, which requires a five-year commitment and requires the FRR plan to serve the entire load of an LSE that opts out, is unworkable in a retail choice environment.

"While stakeholders could productively consider whether the current five-year minimum FRR commitment period still strikes the right balance, there must be some substantial minimum time period associated with that election, to deter market participants from switching between RPM and the FRR alternative simply to take advantage of differences in price trends between the two capacity constructs or to manipulate the market by circumventing the long term reliability and resource adequacy requirements by switching their load repeatedly between the two alternatives," PJM said.

"Similarly, PJM presently sees no alternative to requiring FRR entities to be fully responsible for serving the peak needs of all load (and expected load growth) for which they are responsible in a defined geographic area, plus a reserve margin. The current rule that such discrete loads must be bound by appropriate metering helps enforce that load serving responsibility and prevents FRR entities that have voluntarily separated their loads from the costs and uncertainties of the RPM auction from unfairly leaning on the resources that have been procured in RPM to meet the needs of the loads that remain in RPM. A key design element of the FRR alternative is to ensure the FRR entity manages the entire costs of ensuring long term adequacy through its FRR plan for the load covered by the plan. The FRR plan must manage performance risk within the plan and cannot take advantage of RPM resources and prices that manage risk through the variable resource requirement curve," PJM said.