Green Groups Challenge PJM’s Capacity Performance Rules

The “polar vortex” storm of January 2014 blew in big changes to PJM Interconnection’s operations. But these changes are now the subject of a lawsuit filed by environmental groups, alleging they discriminate against clean energy sources.

The sub-zero temperatures froze coal piles and gearboxes. Natural gas plants, lacking firm contracts for fuel delivery, were unable to get fuel as demand for heating soared. And a number of old, little-used power plants were receiving capacity payments despite their inability to start up on short notice.

In response, PJM developed new, tighter rules for the “base residual auction,” their method of securing new capacity from power plants and demand-side resources. New “Capacity Performance” rules were adopted in late 2014, approved by the Federal Energy Regulatory Commission (FERC) in 2015, and were phased into the past two annual auctions for future capacity. PJM anticipates completing the move to Capacity Performance next year.

But this week, the Natural Resources Defense Council (NRDC), Sierra Club, and Union of Concerned Scientists filed a lawsuit, saying the “new rules are unnecessarily costly and discriminatory” against clean energy sources.

They “will funnel billions of dollars from electricity consumers to fossil and nuclear power plants while severely limiting clean energy participation in PJM’s capacity market,” according to NRDC’s Jennifer Chen.

FERC issued two orders approving PJM’s changes, over objections brought by the green groups, by the American Public Power Association and the National Rural Electric Cooperative Association, and by the Advanced Energy Management Alliance.

FERC Chair Norman Bay dissented from the majority in those orders, saying PJM should have done a cost-benefit analysis and that the penalties for non-performance were too low.

The lawsuit asks the DC Circuit, which has jurisdiction over FERC, to review the approval orders.

Recent Auctions

PJM’s capacity market works by taking annual bids for capacity from both generators and demand-side resources three years in advance. This gives companies time to invest and be ready for action.

Under the new Capacity Performance rules, resources must be “capable of sustained, predictable operation, and are expected to be available and capable of providing energy and reserves when needed throughout the entire Delivery Year,” according to PJM. In practical terms, the resources are guaranteeing they will be available during events like the Polar Vortex, or pay a penalty.

The rules were incorporated into the capacity auction for the first time last year. In that auction, for the 2018-19 year, PJM’s auction costs were dramatically higher, totaling almost $11 billion.

But this May, total costs for the 2019-20 year dropped to $6.9 billion, substantially below expectations. PJM bought 167,306 MW of capacity, mostly at $100 per MW-day, down from $164 the previous year.

PJM attributed lower costs to their lower forecast for demand and a number of new gas combined cycle plants coming into the auction for the first time. Another factor, according to UBS, was the “lower than expected costs (and in turn bids) for the higher reliability requirement of Capacity Performance assets.” They noted that PJM found “the use of third-party marketers to help firm up gas supplies has provided options for ensuring performance that may not have been contemplated.”

How Capacity Performance Affects Clean Energy

NRDC complained that Capacity Performance doesn’t pass basic cost-benefit tests. Quoting Commissioner Bay, the group said, “The proposal essentially fixes a several hundred million dollar uplift problem with a multi-billion dollar redesign of the capacity market.”

But for NRDC’s Chen, the poor showing of wind, solar, and demand response under the new rules is the greatest concern.

During the transition, PJM takes bids for two tiers of capacity—regular “base” capacity and the “no excuses” Capacity Performance, which this year accounted for 80% of the capacity. “Base” capacity has the same performance requirements as Capacity Performance, but only during the summer months.

The two levels get paid different amounts. Base prices in the central region of PJM (called “RTO” in the table below) were $80 per MW-day, while Capacity Performance prices were $100. These prices were down substantially from the previous year (see Figure).

 

Capacity Performance

PJM capacity auction prices for Capacity Performance were substantially higher than the base price in the most recent auction. Source: PJM

 

Clean resources have generally fared poorly under the new rules. In the most recent auction, 10,348 MW of demand response, 335 MW of solar, and 969 MW of wind generation capacity cleared—almost all as base resources, at the lower price. Only energy efficiency resources tend to qualify for the year-round Capacity Performance standards.

“PJM’s market design effectively precludes some loads—like residential air conditioning aggregations—from participation,” says Katherine Hamilton of the Advanced Energy Management Alliance. “The impact of this is unjust and unreasonable rates for all consumers.”

Worse, according to Chen, the “base” capacity product is due to be eliminated next year.

“Next year will be 100 percent Capacity Performance,” says Chen. “If resources can’t qualify as CP, they won’t get paid for capacity.”

She would like to see more flexible rules for capacity procurement, such as procuring capacity by season rather than a full year, to enable more resources to participate.

“The rule changes are a barrier to resources that perform reliably and cheaply in the winter, like wind, and the summer, like solar and smarter use of air conditioning, but not necessarily all year round.”

—Bentham Paulos is a freelance writer and consultant specializing in energy issues.