FERC orders PJM to scrap ‘adder’ mechanism seen bolstering capacity prices
The Federal Energy Regulatory Commission on Thursday ordered the PJM Interconnection to stop using an “adder” in a capacity market methodology that critics contend increases prices and leads the grid operator to buy more capacity than needed.
The 4-1 decision at FERC’s monthly meeting centered on the way PJM sets its demand curve for its annual capacity auctions, which the grid operator uses to make sure it has enough power supplies three years in the future.
As part of its methodology for calculating the net cost of new entry (CONE) – a key parameter in PJM’s capacity auction – the grid operator includes a 10% adder in its assumptions for how much power plant owners will bid in the energy market. The adder is designed to reflect fuel cost risks.
However, in July the U.S. Court of Appeals for the District of Columbia Circuit said FERC failed to adequately explain why it approved the adder in 2019 for the largest U.S. grid operator.
Removing the adder will lower the net CONE by roughly 8% to 9%, which will put downward pressure on PJM capacity prices, possibly leading less efficient power plants to retire, according to Casey Roberts, a Sierra Club senior attorney who argued the case at the appeals court.