FERC Grants Complaints, Directs Further Briefing on PJM Capacity Market Default Offer Cap
On March 18, 2021, FERC granted two consolidated complaints alleging that the default offer cap in PJM Interconnection, L.L.C.’s (“PJM”) capacity market is unjust and unreasonable because the Expected Performance Assessment Intervals input, set at a value of 360 12-minute intervals (30 hours), is too high. Ultimately, FERC found that the default offer cap is “incorrectly calibrated,” rendering PJM and its Market Monitor unable to ensure competitive market outcomes. FERC ordered additional briefing on a replacement rate, but concluded that PJM’s capacity auction for the 2022-2023 delivery year, scheduled for May 2021, should go forward under the current rules.
In PJM’s capacity market, offers below a set default offer cap are deemed competitive, while offers above the cap are subject to review by the Market Monitor and PJM to ensure that the offer is based on legitimate costs and reasonable estimates of unit-specific performance and system parameters. Generation resources that fail to meet their capacity commitments during specific 12-minute intervals when PJM declares an emergency—termed Performance Assessment Intervals (“PAI”)—are assessed a penalty. Resources that exceed their performance obligation and those that perform during an emergency despite having no capacity obligation are entitled to receive a bonus payment. The default offer cap is calculated as a product of the penalty rate (set at the net cost of new entry or “Net CONE” of a reference resource divided by an estimate of the total number of PAI in a given delivery year, or “Penalty PAI”) times a Balancing Ratio (“B,” a measure of average fleet-wide performance during the review period) times the number of Expected PAI in a given delivery year (“H”):
PJM currently estimates both the Expected PAI (H) and Penalty PAI to be the same value of 30 hours, or 360 intervals of 12 minutes, and accordingly abbreviates the formula for the default offer cap as Net CONE * B.