The Federal Energy Regulatory Commission has approved one component of the PJM Interconnection’s two-part proposal to reform its capacity market rules to facilitate the energy transition while maintaining resource adequacy.
The agency late Tuesday okayed the PJM’s “modeling enhancement” plan that revises its resource adequacy risk modeling and capacity accreditation processes and bolsters its testing requirements for capacity resources.
FERC said the grid operator’s plan “will help to ensure that PJM’s capacity market design more accurately represents the PJM system’s reliability needs, as well as the expected ability of both individual resources and the fleet as a whole to meet those needs.”
PJM’s proposals grew out of about two years of stakeholders meetings, which were given urgency following Winter Storm Elliott in December 2022 when the grid operator narrowly avoided rolling blackouts.
FERC is still reviewing the second piece of PJM’s reform plan, which centers on changes to the grid operator’s offer cap and capacity performance rules, including taking a forward looking approach for determining energy and ancillary services revenue to calculate the offer cap and minimum offer price.
PJM had asked FERC to approve both filings by Dec. 12, 2023, so the grid operator could move forward with a capacity auction set to be held in mid-June. PJM’s capacity auctions, typically held once a year to buy capacity three years in advance, have faced multiple delays in recent years. The last auction was held in December 2022 for the 2024/25 capacity year.
Under the approved proposal, PJM will replace its current average “effective load carrying capability” capacity accreditation method with a “marginal” ELCC approach that aims to better measure how much resource adequacy a resource provides, according to FERC’s decision.
“PJM’s [marginal ELCC] proposal will allow its markets to better value the ability of individual resources to address tight system conditions and emergencies, as well as resource adequacy challenges associated with correlated resource outages and an evolving resource mix,” FERC said.
FERC rejected concerns by the Sustainable FERC Project, the Natural Resources Defense Council and the Sierra Club that PJM’s proposal unfairly allocates cost savings from states that invest in lower cost renewable energy and energy storage to states that don’t.
“As markets continue to develop, evidence continues to demonstrate that utilities stand stronger together, delivering greater reliability and lower costs by pooling resources across broad geographical areas,” FERC Commissioner Allison Clements said in a statement. “Reserving specific cost savings for only those load serving entities or market participants in which a particular investment is located is not only practically unworkable and legally unnecessary in a shared pool, it overlooks the reliability and cost benefits that pooled markets impart.”
PJM expects its proposal may increase consumer costs somewhat but provide reliability and efficiency benefits, according to FERC’s decision. As a test, the grid operator reran its last auction using its proposed plan and found that total costs to consumers increased to $2.4 billion from $2.2 billion and that a measure of the expected loss of load fell 25%.
PJM’s proposed risk modeling enhancements are a key step in modernizing its capacity market, according to Clements. “PJM’s development of a new framework that seeks to assess the patterns, drivers, and probabilities of reliability risk across all hours of the year is an important advancement,” she said.
Clements, however, disagreed with part of FERC’s decision dealing with demand response resources. FERC should have initiated a proceeding to assess whether demand resources should be able to supply capacity during morning hours in the winter, Clements said.
FERC Commissioner Mark Christie said the proposal represents “some significant improvements” to PJM’s capacity market, but it won’t make it less opaque and complex.
“Every ‘fix’ — and there have been many since the [reliability pricing model] went into operation about 15 years ago — renders the capacity market construct more incomprehensible,” Christie said. “One could even make a credible argument that its sheer complexity renders it unjust and unreasonable … Perhaps PJM should be required to post a warning to every reader who tries to read and comprehend a detailed explanation of how the capacity market construct works (borrowing from Dante): ‘Abandon all hope, ye who enter here!’”