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FERC Conditionally Accepts PJM Proposal to Refine and Improve PJM’s Risk Modeling Framework

The Federal Energy Regulatory Commission on Jan. 30 conditionally accepted a proposal submitted by the PJM Interconnection to refine and improve PJM’s risk modeling framework.

The proposal aims to improve PJM’s understanding of when and how risk occurs, and to change how both supply and demand are accounted for in the capacity market construct to better align their market representation with resource adequacy fundamentals, FERC noted in its order.

PJM Filing

On October 13, 2023, PJM submitted proposed changes to its Open Access Transmission Tariff and Reliability Assurance Agreement Among Load Serving Entities to modify aspects of its Reliability Pricing Model (RPM), including resource adequacy risk modeling, capacity accreditation, testing requirements for capacity resources, and the Capacity Performance stop loss (Modeling Enhancements Filing) (Docket Nos. ER24-99-000, ER24-99-001).

PJM proposes a number of revisions to its capacity market design that PJM states will enable it to facilitate the energy transition while maintaining resource adequacy in a cost-effective manner.

PJM explains that, historically, the PJM region has been able to maintain resource adequacy by setting target procurement levels (i.e., the Installed Reserve Margin) at the peak load plus a reserve margin and accrediting generation resources based on their Equivalent Demand Forced Outage Rate.

However, PJM states that recent operating experiences such as Winter Storm Elliott have demonstrated that modeling approaches focused on peak load conditions and average generator performance do not fully capture all of the risks that impact resource adequacy needs and resource performance.

Therefore, PJM argues that, without enhancements in these areas, the capacity market will provide insufficient incentives to retain and attract sufficient capacity resources necessary to maintain reliability.

PJM said that the purpose of its filing is to refine and improve PJM’s risk modeling framework to improve PJM’s understanding of when and how risk occurs, and to change how both supply and demand are accounted for in the capacity market construct to better align their market representation with resource adequacy fundamentals.

PJM explained that its proposed enhancements adopt a more temporally granular, hourly framework for assessing risk drivers and probabilities of resource and energy inadequacy throughout the year rather than only during periods associated with peak loads, as under PJM’s current approach.

PJM asserts that this new resource adequacy paradigm will allow PJM to identify the least-cost, efficient portfolio of resources that in aggregate provide resource and energy adequacy in every hour of the year, across all potentially anticipatable scenarios, up to the target reliability metric.

More specifically, PJM proposes to:

  • Replace its current adjusted class average Effective Load Carrying Capability (ELCC) capacity accreditation approach with a marginal ELCC approach and extend ELCC accreditation to all Generation Capacity Resources;
  • Update its resource adequacy risk modeling to evaluate risk on a more granular, hourly level;
  • Enhance its capacity resource testing requirements;
  • Index the Non-Performance Charge Limit (“stop loss”) to the Base Residual Auction clearing price rather than Net Cost of New Entry;
  • Better synchronize the Fixed Resource Requirement (FRR) alternative rules with the capacity auction rules;
  • Require that Planned Generation Capacity Resources submit a binding notice of intent to offer before the capacity auction parameters are posted; and
  • Make other conforming and ministerial tariff revisions.

PJM said that the capacity market reforms proposed in the filing are just and reasonable because they address known and reasonably foreseeable challenges to maintaining resource adequacy at a reasonable cost.

PJM asserts that the filing presents a substantial step forward in improving the status quo, helping PJM to maintain resource adequacy over the near- and long-terms.

At the same time, PJM states that PJM and its stakeholders are committed to continuing to assess the design of PJM’s capacity construct, including whether and how a seasonal capacity construct could help support reliability and efficiency in the PJM region.

FERC Order

FERC conditionally accepted PJM’s Modeling Enhancements filing, subject to PJM submitting a compliance filing within 30 days of the date of the order.

“We find that PJM’s proposal is just and reasonable because it will help to ensure that PJM’s capacity market design more accurately represents the PJM system’s reliability needs, as well as the expected ability of both individual resources and the fleet as a whole to meet those needs,” FERC said, noting that the order addresses the specific elements of PJM’s proposal.

Commissioners Christie and Clements Weigh in On Order

FERC Commissioner Allison Clements concurred in part and dissented in part from the order.

“I write separately for two reasons,” she said. “First, regrettably, despite my view that PJM has demonstrated its proposal to be just and reasonable, I dissent in part from the order because its response to arguments regarding PJM’s choice not to modify its Demand Resource availability window is overbroad and unsupported.”

She said she agrees with the order that any potential changes to the Demand Resource availability window are outside the scope of PJM’s proposal, “and I would have signed onto an order that simply stated and justified this conclusion.” 

Yet the order “gratuitously adds a conclusory statement declaring that the Advanced Energy Management Alliance (AEMA) and Clean Energy Associations ‘have not demonstrated that PJM’s proposed changes in the accreditation methodology and the Reserve Requirement Study render the Demand Resource ‘performance’ window unjust and unreasonable,’” she said.

The order “provides no support for this conclusion.  And the record leads to a contrary result,” she wrote.

“While I would have found the Demand Resource availability window to be out of scope to PJM’s filing because it has not proposed any changes thereto, the Commission should have initiated an order to show cause pursuant to section 206 of the Federal Power Act to address the clear mismatch between PJM’s existing Demand Resource availability window and its new understanding of system risk,” Clements said.

“PJM should be required to either adjust the availability window to reflect its new understanding of risk, or else demonstrate why its proposed changes have not rendered the current availability window unjust and unreasonable or unduly discriminatory,” she wrote.

Beyond dissenting from the Commission’s “arbitrary and capricious response” to demand response providers, she also wrote separately “to explain my support for the Commission’s rejection of Public Interest Organizations’ concern that ‘cost allocation under PJM’s marginal ELCC framework will ‘improperly socialize investments in electricity supply.’”

Clements noted that PJM allocates costs according to the commonly accepted principles under the Federal Power Act, where collateral benefits that accrue to the whole PJM region due to each given resource investment are shared across the region rather than disaggregated and assigned to the host state or load serving entity in which the investment is located. 

“In my view, this approach makes sense. State and local policies of all stripes naturally affect the supply of capacity resources, thereby influencing the costs and benefits that others receive by participating in the capacity market,” she wrote.

“In this case, as with some other regional investments, benefits accrue broadly to customers across the region when ELCC resources enter the capacity market such that a resource’s marginal cost is lower than its average capacity value.  But while the Federal Power Act requires rates to be just and reasonable and not unduly discriminatory, that does not require isolating state policies, attributing the development of certain resources to specific policies (where they may be developed due to many different factors), and charging wholesale customer different capacity rates based on the policy of the state(s) in which they are located.” 

Rather, the just and reasonable standard is met where the relevant utility “engages in the more straightforward exercise of determining a cost of the relevant product (here, capacity), and charging each customer for the share of that capacity which they need to purchase,” Clements said.

“Attempting to disaggregate the effects of state policy, as Public Interest Organizations suggest the Commission do, opens the door to a contentious exercise that will ultimately prove impracticable given the ‘inextricable link[]’ between matters of state and federal jurisdiction over electricity markets,” she wrote.

As markets continue to develop, “evidence continues to demonstrate that utilities stand stronger together, delivering greater reliability and lower costs by pooling resources across broad geographical areas. Reserving specific cost savings for only those load serving entities or market participants in which a particular investment is located is not only practically unworkable and legally unnecessary in a shared pool, it overlooks the reliability and cost benefits that pooled markets impart.”

Commissioner Christie’s Concurrence

“Despite my serious concerns about PJM’s failure to propose a transition period for the application of the new Capacity Deficiency Charge for utilities that have chosen Fixed Resource Requirement (FRR) status, about which more below, I nevertheless concur in the approval of PJM’s filings in this matter,” wrote Commissioner Mark Christie in a concurrence.

“While I am sympathetic to the Independent Market Monitor’s (IMM) claim that these reforms are ultimately inadequate to ‘fix’ once and for all the PJM capacity market, they do represent some significant improvements and do meet the standard for approval under section 205 of the Federal Power Act (FPA),” he said.

“In particular, PJM finally moves from an average ELCC methodology to a marginal one, which I and the IMM both strongly advocated in a recent major PJM capacity reform filing. So better late than never.”

While voting to approve the filing overall as meeting the Federal Power Act section 205 standard, Christie joined “the serious concerns expressed” by the FRR Coalition (Dominion Energy Services, Inc., American Electric Power Service Corp., and Duke Energy Kentucky). 

Christie said that the heart of the FRR Coalition’s Limited Protest is the time frame allowed for FRR utilities to transition to the new Capacity Deficiency Charge. The FRR Coalition asks for a slightly longer transition period to comply, “which I find an entirely reasonable ‘ask.’ Yet PJM has not agreed to this,” Christie said.

“It should be noted that PJM, as the operator of its own capacity market, has an incentive to discourage load-serving utilities from choosing FRR status. FRR utilities self supply, usually through a combination of constructing generation units, purchasing through bilateral power purchase agreements (PPAs), or open-market purchases in PJM’s markets,” Christie said.

FRR utilities “have chosen not to subject their customers to the vagaries and risks of complete dependence on the PJM capacity market to meet their load-serving obligations,” he said. 

“So my ideal outcome would have been that the Commission approve the filing but impose a condition that PJM grant the FRR utilities their requested transition time related to the Capacity Deficiency Charge.”

But the Commission’s ability to direct revisions to a section 205 filing is limited, and such an outcome could raise serious legal risks, he noted. “Since I believe the filing overall meets the section 205 standard, as I described above, I will concur with the order accepting it.”  

He urged the FRR utilities, “however, to monitor the impacts on their customers in terms of costs and reliability as implementation of PJM’s reforms take place, and if evidence materializes that their customers are being subjected to unjust and unreasonable rates as a result, the FRR Coalition has the option to file a section 206 complaint.” 

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