PJM capacity market overhaul approved

OREANDA-NEWS. June 15, 2015. US regulators approved PJM Interconnection's plans to overhaul its market rules to make capacity resources pay large penalties for failing to perform.

The Federal Energy Regulatory Commission voted 4-1 yesterday to approve the new "capacity performance" requirements, marking the largest change to PJM's capacity market since federal regulators first approved its design in 2006. The rules take a "no excuses" approach for resources that fail to perform during the estimated 30 hours of emergency conditions each year but would give generators the flexibility to charge higher rates for capacity.

Agency chairman Norman Bay was the lone dissenter from the order, citing concerns that the change could let generators charge billions of dollars more each year for capacity while not necessarily improving grid reliability.

"In short, PJM has purchased little certainty for what may be a lot of money," Bay said. He added that the market design could allow generators to collect higher capacity revenues even if they never performed during emergency conditions.

PJM estimates the rules could cost up to \\$4bn/yr, with coal and nuclear resources that already have firm fuel supplies likely among the greatest beneficiaries, though some will need to weatherize equipment to prevent unplanned outages. PJM did not set specific fuel supply requirements. But gas-fired generators that rely on interruptible pipeline contracts for fuel will likely need to invest in backup fuel or firm transportation.

The requirements will likely take effect for PJM's upcoming auction for the June 2018 to May 2019 delivery year, which the grid operator said today would begin on 10 August. PJM said it was reviewing the decision.

The grid operator developed the new rules after the extremely cold 2013-14 winter, when on one day 22pc of PJM's generating capacity failed to perform and uplift payments reached \\$667mn in just two months. PJM worries that reliability problems could worsen in coming years as aging coal plants retire to comply with new federal air pollution rules.

The capacity performance design includes a two-settlement process, in which resources get an initial payment based on the clearing price of PJM's annual forward capacity auction and then receive an extra payment if they perform better than required during emergency conditions. Capacity resources that fail to perform would have to pay a non-performance penalty that would compensate the over-performers.

PJM also narrowed its definition of "force majeure," conditions under which a generator is excused from performing. It now means a systemic failure to most or all of PJM's transmission system or fuel delivery network, limiting the ability of generators to seek exceptions.