On April 15, 2019, FERC accepted PJM Interconnection, L.L.C.’s (“PJM”) changes to its Variable Resource Requirement (“VRR”) demand curve as well as key cost inputs to the curve, in connection with PJM’s 2019 Base Residual Auction for the 2022/2023 Delivery Year. While FERC concluded that PJM’s proposal would produce accurate market signals, encourage appropriate capacity investment, and achieve an adequate level of reliability, the decision sparked a dissent from Commissioner Glick, who argued that PJM failed to show that its proposed VRR curve would produce just and reasonable rates. Commissioner Glick added that the proposal did not go far enough to correct either oversupply of generation in the capacity market or distorted price signals for Energy and Ancillary (“EAS”) services.
The VRR curve is an administratively-designed demand curve used to set prices in PJM’s centralized capacity market; it is designed to procure enough capacity to meet resource adequacy objectives while avoiding price volatility. PJM reviews the shape of its VRR curve as well as the Cost of New Entry (“CONE”) and EAS cost inputs to the curve every four years, as required by its Open Access Transmission Tariff. The CONE represents levelized capital costs and fixed operation and maintenance expenses of a representative new power plant known as the “Reference Resource.” Net CONE is calculated by subtracting from CONE the net EAS revenues (i.e., net revenues that the plant could be expected to earn in the PJM energy and ancillary services markets, based on actual Locational Marginal Pricing and fuel prices over the past three years).
A highly contested aspect of PJM’s proposal was its decision to designate as the Reference Resource a combustion turbine power plant with a new H-class turbine configuration, rather than adopting the recommendation of its independent consultant to use a combined cycle power plant. In so doing, PJM cited its historical use of a combustion turbine plant as the Reference Resource, arguing that it was reasonable to keep using a combustion turbine plant because they are typically built at lower total cost than combined cycle plants, and can be deployed quickly to address resource adequacy and reliability concerns. PJM also argued that updating the turbine technology to the newer and more efficient H-class turbine would permit it to reduce the estimate of gross CONE by 20% in all areas of the PJM region.
FERC accepted PJM’s Reference Resource proposal, finding that PJM sufficiently justified this approach based on project development trends, lower costs, and improved efficiency. In his dissent, Commissioner Glick argued that combined cycle units are the dominant form of new entry into the PJM capacity markets, and that using a combustion turbine as the Reference Resource would set Net CONE at a rate in excess of that actually required for new suppliers to enter the market. This in turn, Commissioner Glick argued, will cause PJM to procure more capacity resources than it actually needs, and require consumers to pay excessive prices for a suboptimal resource mix.
FERC also accepted PJM’s proposal to, among other things, lower prices at all capacity levels by shifting the VRR curve left by one percent, and to include a ten percent cost adder in the method used to estimate the Reference Resource’s net EAS revenues. FERC agreed with PJM’s conclusion that the adder would make the net EAS calculation more accurate by accounting for uncertainties in energy market participation costs. While Commissioner Glick did not take issue with FERC’s conclusion, his dissent pointed to “significant concerns” associated with the use of the three-year historical average in the calculation. Furthermore, Commissioner Glick encouraged PJM and its stakeholders to develop a forward-looking methodology for determining EAS revenue estimates.
FERC’s order, including Commissioner Glick’s dissent, is available here.