FERC Conditionally Approves PJM’s Capacity Market Reforms; Chairman Bay Dissents
On June 9, 2015, FERC conditionally approved significant reforms to PJM Interconnection LLC’s (“PJM”) capacity market framework. In doing so, FERC stated that PJM had demonstrated that the reforms were needed in order to ensure the long-term reliability of the electric supply within the PJM region. Meanwhile, Chairman Norman Bay dissented, stating that PJM’s proposal was seriously flawed, and may “result in billions in additional costs for consumers without achieving its intended aim.”
PJM designed its existing capacity market framework, referred to as the Reliability Pricing Model, to ensure that the PJM region had adequate resources at a reasonable cost through the use of an annual auction. In its proposal to reform that framework, PJM stated that the Reliability Pricing Model had not adequately kept pace with the level of commitments that PJM required. PJM further noted that the Reliability Pricing Model applied inadequate penalty charges for sub-par performance while failing to adequately ensure actual performance. As a result, PJM stated that the Reliability Pricing Model threatened the reliable operation of PJM’s system and had the potential to require consumers to pay for capacity without receiving commensurate benefits.
To address these concerns, PJM proposed an entirely new capacity product, the Capacity Performance Resource. According to PJM, this new product would be developed to provide sustained and predictable operation, and would be able to reliably provide energy and reserves in the event of an emergency condition within PJM. Among its more significant features, PJM noted that its proposal included more significant charges for poor performance, increased credits for superior performance, and a must-offer requirement for any qualifying “Capacity Performance Resources.” PJM proposed a phased-in approach in order to transition to the new product, with an interim “Base Capacity Resources” product, characterized by a lower performance expectation and exposure risk, for the 2018-19 and 2019-20 delivery years. During that time, PJM anticipates that it will procure at least 80 percent of the region’s capacity requirements in the form of Capacity Performance Resources, with the remainder composed of Base Capacity Resources. For the 2020-21 delivery year and beyond, PJM proposed to procure all of the region’s capacity requirements in the form of Capacity Performance Resources.