FERC orders PJM to change reserve market rules, delay capacity auctions

Dive Brief:

Reversing parts of an earlier decision, the Federal Energy Regulatory Commission on Wednesday ordered the PJM Interconnection to revise its reserve market rules, which will delay the grid operator's upcoming capacity auction.
In a 3-1 vote, FERC reaffirmed its previous decision to direct PJM to consolidate tier one and tier two reserve products, but said it had erred by approving changes to the grid operator's operating reserve demand curves (ORDC), which help set the price for reserves.
“This rule change seems like a small detail, but the ripple impacts may be more significant and touch a lot of aspects of the PJM market,” Scott Niemann, ESAI Power director and principal, said in an email.

Dive Insight:

FERC in May 2020 largely approved a PJM proposal to overhaul its reserve market, which the grid operator uses to make sure it has backup power supplies if there is a sudden change in electric supply.

The Public Utilities Commission of Ohio, the Maryland Public Service Commission, the PJM independent market monitor and others opposed the plan, partly over concerns the new ORDCs would increase ratepayer costs by up to $2 billion a year. In a dissent, then-FERC Commissioner Richard Glick shared those fears.

The Maryland Office of People's Counsel, PJM's market monitor, a group of industrial companies and others asked the U.S. Court of Appeals for D.C. Circuit to reverse FERC's decision. In response to a FERC request, the court in August remanded the agency's decision back to the commission.

In the latest decision, FERC said PJM failed to show its “reserve penalty factors” and two-step ORDCs that had been in place before the commission approved changes last year were unjust and unreasonable. FERC Commissioner James Danly voted against the decision in a dissent to be published later.

FERC also reversed itself and said PJM must use a backward-looking, instead of forward-looking, energy and ancillary services offset (E&AS), which is designed to reduce capacity market revenue to match any gains generators receive through the reserve markets.

FERC gave PJM 60 days to revise its rules in line with the decision. PJM also has 30 days to set a new schedule for upcoming capacity auctions, which have faced multiple delays in recent years. The next auction was set to occur on Jan. 25.

The decision could affect PJM in several ways, according to ESAI's Niemann.

The grid operator, for example, is in the process of revising its methodology for calculating the net “cost of new entry” (CONE), an important component that helps determine capacity prices, Niemann said.

In an initial recommendation, the Brattle Group suggested using the forward looking E&AS and shifting from a combustion turbine reference unit to a combined cycle unit to determine the net CONE, according to Niemann. However, a backward-looking E&AS works reasonably well with a combustion unit, but can be “problematic” with a combined-cycle unit, he said.

Also, the delay in the capacity auctions may allow for court decisions in litigation over FERC decisions related to PJM's minimum offer price rule (MOPR) and its market seller offer cap (MSOC) to play out before the auctions are held, according to Niemann.

“Delaying the auction potentially allows time for rule changes from pending legal challenges to the MOPR and MSOC rules, should they be successful, to be addressed,” he said.