Legal & Regulatory

PJM Capacity Market Reforms Shake Up Resource Accreditation, Impose New Offer and Testing Requirements

The Federal Energy Regulatory Commission (FERC), in Docket No. ER24-99-000, recently approved a suite of tariff revisions submitted by PJM intended to “accommodate the energy transition while maintaining resource adequacy.”

Although the reforms affect many aspects of PJM’s Reliability Pricing Model (RPM), this commentary highlights:

  • The transition from capacity accreditation using Equivalent Demand Forced Outage Rate (EFORd) to marginal Effective Load Carrying Capability (ELCC) for all generation resources.
  • Imposition of new capacity testing requirements.
  • The new requirement to submit a “binding notice of intent” in order to participate in capacity auctions.
  • Reduction of Performance Assessment Interval (PAI) penalty charge “stop loss” amount.
  • Alignment of RPM and FRR deficiency charges, multi-year waiver of insufficiency charges.


No More EFORd—Changes in Capacity Accreditation

Some of the imperfections with PJM’s former EFORd accreditation methodology were that (1) it did not distinguish amongst the periods when forced outages occurred, i.e. time on outage during emergency conditions would be treated the same as any other time on outage for EFORd purposes; (2) it did not capture the resource adequacy risks associated with correlated outages; and (3) the results in part depended on the quality and completeness of outage reporting to NERC’s Generating Availability Data System (GADS).  For these reasons, among others, PJM sought to implement an accreditation framework that better captures generating resources’ actual contributions to resource adequacy.  In addition, the changes better align accreditation of traditional generation with variable generation, which have had their capacity accredited on an ELCC basis for years.

Maxwell Multer

Through the application of complex modeling using weather data going back to 1993, the new ELCC-based methodology accredits resources based on their marginal contribution to resource adequacy.  The general idea of ELCC is that most resource types have pros and cons when it comes to reliability and availability.  To account for this, individual resources will be accredited based on how much marginal benefit is added to the system on a per MW basis when compared to a hypothetical “perfect” MW of energy that is online 24/7, instantly available, and never on outage.  PJM will use a three-step process to accomplish this.

Each year, PJM will first determine a revised ELCC class rating for each resource type.  Again, this ratio represents the value to resource adequacy of a MW of that class of resource’s capacity, as compared to a MW of the hypothetical perfect resource’s capacity.  The applicable ELCC class rating is multiplied by the nameplate capacity of the resource to yield a gross capacity value for the resource.  Finally, PJM will apply to that value a “Resource Specific Performance Adjustment” (RPA) that is based on the individual resource’s historical performance going back to 2012 – this step serves the same general purpose as EFORd, but incorporates a broader analysis to account for the timing of past performance shortfalls, among other factors, and uses actual offer and performance data instead of self-reported outage data.  The resulting accredited UCAP value will be communicated to resources each year, to be applicable during the following calendar year.

Insights: Whereas the prior accreditation methodology only changed UCAP values in a limited and fairly predictable way based on a resource’s EFORd (which was a comparatively simple calculation), the new ELCC framework involves many more moving parts that will impact capacity accreditation on an annual basis.  Some of those parts, notably the class ELCC ratings, are completely outside of the control of individual resource owners.  Actual volatility of final UCAP values on a year-to-year basis remains to be seen.  As such, buyers and sellers of capacity in the bilateral market, in particular for longer term deals and/or years beyond the current BRA planning year, should ensure transaction terms account for this potential volatility in an appropriate way.  We expect that many resource owners whose accreditation is now transitioning from EFORd to ELCC will initially see a decline in accredited UCAP.  In addition, the regular recalibrating of class ELCC values, and the resulting impacts to individual capacity accreditation, introduces additional complexity to financial modeling of expected capacity revenues, although the Tariff does require PJM to post non-binding indicative ELCC class ratings going forward ten Delivery Years. 

New Generator Testing Requirement and Penalties

The existing generator capacity capability test must now be conducted in both the summer and winter seasons for Generation Capacity Resources (except for variable resources) committed through an RPM Auction or in an load serving entity’s (LSE) Fixed Resource Requirement (FRR) Plan.  Beginning with the 2025/2026 Delivery Year, the penalties for failing a test will be based on a resource’s MW shortfall on the daily installed capacity commitment of the resource rather than annual average of the installed capacity committed on the resource.

In addition, PJM has adopted a new operational test to evaluate whether resources are able to meet offered start-up times.  However, not all resources will be subject to this particular testing.  The resources selected, and the timing of the tests, will be subject to PJM’s discretion and based on several risk factors, such as the amount of time since the unit has operated and recent operational performance.  A resource that fails this Generator Operator Test (after a retest) will be subject to a daily failure charge until it conducts a successful test.

The approved reform package also includes changes to testing for Demand Resources (DR).  If DR is dispatched during a PAI, this will be treated as its annual capability test.  If a DR resource has not been dispatched for a Load Management event in a delivery year and assessed for performance during PAIs, PJM will test the resource for a two-hour period at some point during the delivery year.

Capacity Resources

Beginning with the 2025/2026 Delivery Year, in order to be eligible to offer into any RPM auction, capacity resources must submit a binding notice of intent to offer into such auction.  The notice does not include a specific MW amount, so the fact that the resource may not yet know how much capacity they are eligible to offer is not a problem.  For the Base Residual Auction (BRA), the notice must be provided by December 1.  For Incremental Auctions, the notice must be provided 90 days prior to the auction.  If a capacity resource submits a binding notice of intent, but subsequently fails to offer into the relevant auction, it will be barred from all subsequent auctions for that delivery year and its capacity can not be used to satisfy any LSE’s Unforced Capacity Obligation (i.e. through an FRR plan).

Insights: Don’t miss this important submission to participate in PJM’s capacity auctions and, if notice is submitted, make sure to follow through and submit the offer.  Being shut out of both the RPM auctions and use by an FRR entity will severely impact the ability to monetize a generating resource’s capacity attributes in PJM.

Recalibration of ‘Stop Loss’

The PAI non-performance charges that followed Winter Storm Elliott laid bare the tremendous (and imbalanced) risk associated with a Capacity Resource’s failure to perform during even one PAI.  Comparing the existing charge limit of 1.5 times net cost of new entry (Net CONE), which for the 2022/2023 Delivery Year yielded a stop loss of approximately $135,000/MW-year, with the RTO BRA clearing price of around $18,250/MW-year, we see that a resource could be at risk of losing around 7.5 years’ worth of capacity revenues based on non-performance in a single event.  Particularly with PAI exceptions being so limited (i.e. excused failure to perform during a PAI), the concern was that resource owners might choose not to offer capacity because the risks are so significant.

As a result, FERC approved PJM’s proposal to index the annual stop loss amount to the relevant BRA clearing price instead of net CONE.  That is, the maximum PAI penalty assessment in a given year is now equal to 1.5 times the relevant BRA clearing price, per MW-year.  Rather than being penalized by up to seven times a resource’s annual capacity revenues (or more, depending on how low the BRA clearing price is), resources will now be subject to maximum annual penalties of 1.5 times their capacity revenue for the relevant delivery year.

Insights: Capacity Resources enjoy significantly reduced non-performance penalty risk as a result of this change, particularly taken together with the recent changes to what constitutes an Emergency Action under the tariff.

FRR Entities

LSEs that elect the FRR alternative must provide a capacity plan showing that they have procured enough capacity in advance of the upcoming delivery year.  Failure to do so subjects such utilities to the FRR Capacity Insufficiency Charge after inability to cure within five days of the submission deadline, and then daily deficiency charges once the delivery year begins.  Prior to the subject reforms, the insufficiency charge was equal to two times CONE (in $/MW-day) for the relevant location times the MW shortfall below the entity’s capacity obligation; the daily deficiency charge was equal to 120% of the applicable BRA clearing price.  The tariff revisions now base both of these calculations on the price level corresponding to point (1) of the Variable Resource Requirement curve for the relevant Locational Deliverability Area, which represents the maximum price level loads participating in the BRA would pay if the RPM auction cleared short of the reliability target.

The larger impact to FRR entities comes from the combination of overall impacts of adoption of the ELCC accreditation methodology with the lack of a transition mechanism for the capacity deficiency charge.  Recognizing that the new framework will result in many resources having less UCAP available to meet reliability requirements, the approved proposal provides two transition mechanisms: (1) FRR entities have the ability to discontinue using the FRR alternative and return to the RPM beginning with the 2025/2026 Delivery Year; and (2) the capacity insufficiency charge is waived through the end of the 2028/2029 Delivery Year.  However, during the transition, FRR entities will still be subject to capacity deficiency charges once each Delivery Year starts.

Insights: The increase in the capacity deficiency charge, together with likely reduced UCAP values for much of the generating fleet, brings an increased level of urgency for FRR entities to procure adequate capacity in the bilateral market.  To the extent forward capacity is procured for multiple delivery years, contractual arrangements should account for potential fluctuations in accredited capacity for individual resources based on changing ELCC class ratings and RPAs from year to year.  LSEs should consider in advance how they will procure supplemental capacity in the event annual accreditation changes render prior arrangements insufficient. 

Maxwell Multer is an energy lawyer with Bryan Cave Leighton Paisner (BCLP). He represents clients in regulatory and enforcement matters before the Federal Energy Regulatory Commission,  state utility commissions, and other regulatory authorities. BCLP assists PJM market participants with all manner of regulatory, transactional, enforcement, and stakeholder matters.

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