PJM Files Proposal Allowing Carve-Out Of Subsidized Resources From Capacity Market, Details Allocation To LSEs

PJM filed with FERC proposed changes to its Reliability Pricing Model capacity market to accommodate a carve-out of state-subsidized resources from the market, along with the removal of an associated amount of load, after FERC suggested such mechanism in an order on other revisions that PJM had proposed to combat so-called price "suppression"

PJM's proposed Resource Carve-Out (RCO) option provides an avenue for a Capacity Market Seller of a Capacity Resource with Actionable Subsidy, to choose such resource to be carved out from the capacity market. Specifically, a Carved Out Resource, along with an associated load, would not obtain their commitment through PJM’s capacity market, and neither would make nor receive payments from the capacity market.

Concerning how load is treated, a Capacity Market Seller electing the Resource Carve-Out Option, a Capacity Market Seller would be required to notify PJM of the UCAP MW amount that the resource owner seeks to carve out on an annual basis. The maximum unforced capacity (UCAP) MW quantity for those Capacity Resources that elect the RCO option would be determined using the lower of the generation resources’ EFORd calculated based on outage data for the 12 months ending September 30th prior to the Base Residual Auction or the 5 Year Average EFORd based on outage data for the 12 months ending September 30th prior to the BRA.

As part of the Resource Carve-Out election, the Capacity Market Seller would specify a UCAP amount for the Carved Out Resource up to the maximum UCAP amount associated with the resource owned by the Capacity Market Seller, determined as described above. This will provide Capacity Market Sellers with the flexibility to specify a lower UCAP amount for a Capacity Resource with Actionable Subsidy to lower the risks of potential Capacity Performance penalties as a result of a forced outage or derating.

PJM proposes a default rule that, for each Capacity Resource that has elected the RCO option, all LSEs located in the same state as that resource will have their Locational Reliability Charge reduced by a Resource Carve-Out offset. The size of an LSE’s offset would be determined based on the ratio of the LSE’s Daily Unforced Capacity Obligation in the state and the aggregate total of the Daily Unforced Capacity Obligations of each LSE serving load in that state. Thus, the offset for each resource would be allocated pro rata across all load within a state

PJM would use the state-specific Obligation Peak Load for each LSE serving load within the subsidizing state to determine the LSE’s Daily Unforced Capacity Obligation within that state by multiplying the Obligation Peak Load by the Final Zonal RPM Scaling Factor and the Forecast Pool Requirement. This is the same method PJM uses to determine an LSE’s overall Daily Unforced Capacity Obligation under RAA

However, PJM said that, "this is merely the default approach to removing from load the capacity cost of a carved out resource. The proposed Tariff contemplates parties seeking alternative approaches to allocate the credit for specific resources through a proceeding under FPA sections 205 or 206."

Under the proposed carve-out, the RCO resource and associated load would remain in the RPM auction (with the RCO resource offered at $0), because PJM said that, removing such RCO resources and load from the auction completely is unworkable, due to the need to account for capacity import limits, and because some subsidies (state-mandated RECs) can be provided across state lines.

PJM also offered an "extended" RCO proposal, which it said is meant to blunt the price suppression impacts that RCO resources would have on the capacity auction clearing price

Extended RCO adds a second stage to the auction to determine a second stage price. In stage two, PJM would remove from the supply stack all resources that elected the RCO option; PJM would make no adjustment to demand (load) or the VRR curve. PJM would then re-run the optimization algorithm and the intersection point between the supply stack and the VRR curve will be the Resource Clearing Price.

The second stage will result in some uncommitted units now having offers below the resulting Resource Clearing Price (uncommitted inframarginal units). Extended RCO would pay a displaced inframarginal resource the inframarginal rents it would have received had it not been forced out to make room for the RCO resource. The displaced seller does not receive compensation for the amount of its offer, because that part reflects the avoidable costs that it need not incur, because it is not committed as capacity

Extended RCO would pay inframarginal resources that do not clear for the infra-marginal rents they would have received had they not been displaced to make room for the subsidized uneconomic resource that elected the Resource Carve-Out. These payments are to be recovered from the RCO resources under PJM's proposal (not load)

Docket No. EL16-49 et. al.