On December 11, 2015, FERC issued an order accepting PJM’s proposed tariff and operating agreement revisions that would (1) double PJM’s energy market offer cap from $1,000/MWh to $2,000/MWh for cost-justified offers, (2) cap market-based offers at $2,000/MWh only when the corresponding cost-based offer is above $1,000/MWh, and (3) allow market sellers of generation resources with demonstrated costs above $2,000/MWh to recover those costs through make-whole payments. Although PJM’s proposal was made in advance of potential natural gas price spikes in the 2015–2016 winter, PJM’s proposal would apply year-round.
As FERC explained in its order, in January 2014, cold weather caused natural gas prices to spike, driving the costs of producing electricity from certain gas-fired generators to exceed PJM’s $1,000/MWh offer cap for market-based and cost-based sell offers. Because of the offer cap, certain resources were not permitted to include their marginal production costs in their cost-based offers. On January 23, 2014, PJM filed, and FERC later granted, two emergency requests for temporary waiver of provisions of its tariff: (1) a waiver of the offer cap to permit make-whole payments to market sellers who were barred by the offer cap from including all legitimate costs in their offers, and (2) a waiver request to permit the submission of cost-based offers from generators at prices that exceeded the $1,000/MWh cap. On January 16, 2015, FERC also granted PJM’s temporary waiver request proposing to allow resources to submit offers of up to $1,800/MWh, to allow those offers to set Locational Marginal Price (“LMP”) for the 2014–2015 winter, and to allow generators to recover any actual incurred costs above the cap through a make-whole payment.
On October 14, 2015, PJM proposed tariff and service agreement revisions to increase its energy market offer cap from $1,000/MWh to $2,000/MWh for cost-justified offers for the purposes of calculating merit-order dispatch. However, PJM proposed that those offers will be limited to $2,000/MWh for purposes of setting LMP. PJM also proposed to allow market-based offers, for which the corresponding cost-based offers are above $1,000/MWh but less than or equal to $2,000/MWh, to rise along with the corresponding cost-based offer. If the cost-based offer exceeds $2,000/MWh, PJM proposed that the corresponding market-based offer may not exceed $2,000/MWh. PJM further proposed to allow market sellers of generation resources with demonstrated costs above $2,000/MWh to recover those costs through make-whole payments, subject to an after-the-fact review by PJM and its Independent Market Monitor. Unlike its prior waiver filings regarding offer caps, PJM’s new proposal would apply year-round, rather than only to the winter months, and would remain effective until superseded. Finally, PJM proposed to allow, under the increase in the offer cap, shortage prices to exceed the current tariff level of $2,700/MWh but not to exceed $3,700/MWh.
In its December 11 order, FERC determined that PJM’s proposed tariff revisions were just and reasonable. FERC agreed with PJM that its filing addresses the potential risk of high natural gas prices while protecting consumers by requiring verification of offers above the price cap. FERC also found it reasonable for PJM to make the provisions a permanent part of its tariff because the purpose of raising the offer caps is to allow market prices to reflect generators’ underlying cost during any period of operation. Further, FERC found the possible increase in energy shortage prices up to $3,700/MWh to be reasonable because FERC permits energy prices during shortages to reflect the opportunity costs of foregone operating reserve profits.
A copy of the order is available here.