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Industry Leaders Voice Concerns over PJM's Capacity Proposal

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Last month, we covered PJM Interconnection's new capacity proposal.

The new design — known as Capacity Performance — includes updated performance standards for generators as a response to poor performance during the polar vortex, new regulations, and the changing generation mix within its jurisdiction. The proposal was approved by the Federal Energy Regulatory Commission (FERC) last month (dockets EL15-29, ER15-623).

Despite FERC's approval, however, there have been many lingering questions among industry stakeholders about the transparency of future costs and capacity auctions. As part of the proposal, there will be a shift to an annual product — that requires all supply to be available during winter and summer peak demand — with higher penalties for non-performing units and significantly more compensation for performing units. The fundamental concern is that larger capacity payments to generators will increase energy prices for the region’s consumers and businesses as capacity is a cost component of their electricity supply service. We remain concerned that the way this is structured, generators will financially hedge their performance requirements, and it is unlikely that reliability will be significantly improved during times of peak demand.

Because of these concerns, nearly every party to the FERC proceeding requested rehearing or clarification. Specifically, Direct Energy supported a Retail Energy Supply Association (RESA) filing requesting reconsideration of the FERC’s ruling. Direct Energy also participated in filing that created a new docket that raised concerns about the auction clearing methodology for the transitional auctions (ER15-88). FERC has issued one subsequent order to date on this matter, finding that contrary to PJM’s position, demand response and energy efficiency products are allowed to be bid into the special performance capacity transitional auctions. The ruling caused PJM to postpone the transitional auctions until the end of August. 

FERC has not, however, ruled on a separate but related docket wherein certain parties requested FERC to order PJM to change its modeling assumptions, which would lower the amount of capacity required to satisfy PJM’s reliability requirement. Unfortunately, as FERC Chairman Norman Bay highlighted in his lone dissent of the Capacity Performance filing, FERC is not required to evaluate whether a market change would be beneficial to consumers, nor is it required to consider potential costs to consumers. Rather, FERC’s legal mandate is to ensure that sellers in a market receive just and reasonable rates. Thus, the decision is expected to be left to PJM’s discretion. 

FERC is expected to defer to PJM Interconnection on the various rehearing requests, two other related dockets on clearing the auction model in a least cost manner, and the request to modify PJM’s modeling assumptions for the upcoming auctions.

Direct Energy will continue to represent the best interests of our customers. For more information on how PJM Interconnection's capacity changes will affect customers, check out this recent blog post.

Marjorie Phillips is Director of RTO and Federal Services at Direct Energy.

Posted: August 20, 2015