On January 16, 2015, FERC approved PJM Interconnection LLC’s (“PJM”) request to raise its cap on cost-based energy offers from $1,000/MWh to $1,800/MWh for the winter season.  According to PJM, the increase is designed to ensure that generators can recover all their costs in the event of severe cold during the 2014/2015 winter.  PJM’s requested increase was based on last winter’s highest cost-based offer of $1,725/MWh.

Due to the severe winter of 2013/2014, market sellers within PJM incurred generator costs that exceeded $1,000/MWh, but due to PJM’s offer cap of $1,000/MWh, the market sellers were not able to reflect their marginal costs in their offers, and some took a forced outage on the units.  As a result of these conditions, PJM requested temporary waivers of the offer cap, and permission to receive make-whole payments between the generators actual price and offer cap.  FERC approved both waivers.

In an attempt to prevent a repeat of these issues, PJM proposed the temporary increase to allow cost-based offers up to $1,800/MWh and then let those offers set the locational margin prices.  In addition, generators would also be allowed to recover costs above the increased cap through uplift payments, after cost verification by PJM and its Independent Market Monitor (“IMM”).  Finally, PJM proposed to revise its tariff so that its cost-based adder would be the lesser of 10 percent of the cost-based offer or $100/MWh.  PJM requested an effective date of January 9, 2015 for the temporary increase.

FERC approved PJM’s proposal and requested effective date, holding that the potential for increased fuel costs during the winter months rendered PJM’s current offer cap of $1,000/MWh inadequate.  Moreover, FERC held that PJM’s proposal “is a reasonable approach at this time that appropriately balances multiple potential sources of market inefficiency for the 2014/2015 winter” and provides additional protection to customers through the independent verification of costs over the offer cap.  In accepting the proposal, FERC directed PJM to submit a ministerial compliance filing to include an expiration date for the new offer cap of April 1, 2015 by no later than February 27, 2015, and directed the IMM to submit an information filing within 30 days of the expiration of the increased offer cap.

In addition, FERC noted that it is currently exploring potential changes to market design and operational practices in Independent System Operators and Regional Transmission Organizations to ensure appropriate price formation.  FERC also stated that while it continues to consider these issues, PJM’s proposal requires immediate relief, and any discussion regarding changes to the offer cap beyond the 2014/2015 winter should be addressed to Docket No. AD14-14-000.

A copy of FERC’s order is available here.