FERC has issued an order on PJM's quadrennial revision of its Variable Resource Requirement (VRR) Curve used in the Reliability Pricing Model (RPM) capacity "market"

The order administratively determines various parameters of the RPM construct, such as Net Cone, Net EAS Estimate, and the reference unit, in addition to the design of the curves themselves.

See FERC's order addressing various aspects of the curves here (Docket ER19-105)

Commissioner Richard Glick dissented, stating, "I dissent from today’s order because PJM has failed to show that its proposal will produce just and reasonable rates. For many years now, the PJM capacity market has suffered from a chronic oversupply of generation resources. The primary factor driving that oversupply is PJM’s excessively high Net Cost of New Entry parameter (Net CONE), which has incentivized new resources to enter the market when they are not needed and caused PJM to procure far more resources than it should. Since the 2015/2016 Base Residual Auction, over 31,000 MW of new generation resources have cleared the PJM capacity market, despite the auctions clearing at prices that were on average 60 percent below Net CONE. Those figures indicate that developers are willing to enter the market at a fraction of PJM’s estimate of Net CONE. An excessive Net CONE distorts the shape of the demand curve that PJM uses in its capacity market, causing PJM to procure too many resources at too high a price, with obvious detrimental consequences for consumers."

Glick stated, "But the harm from an excessive Net CONE goes beyond its impact on consumers’ bills. By retaining too many resources, PJM dulls the price signals in the markets for energy and ancillary services (E&AS), impairing their ability to incentivize the services we actually need to reliably operate the grid. A market is only as efficient as the price signals it sends. So long as the flaws in PJM’s capacity market distort the prices throughout the other PJM markets, consumers will pay excessive prices and get a suboptimal resource mix. Net CONE also sets the market seller offer cap, giving it a significant role in protecting against the exercise of market power in the capacity market. As a result, an artificially high Net CONE increases the potential for market power abuse."

Glick stated, "Faced with mountains of evidence indicating that PJM’s capacity market is over-procuring resources—harming customers and hindering price formation in its other markets—one might expect that PJM and the Commission would take a holistic review of the capacity market, starting with the VRR curve. Unfortunately, today’s order does not give this matter the careful consideration it demands. Instead, the Commission uncritically accepts PJM’s filing in the face of contrary Commission precedent, persuasive protestor arguments, and many unresolved questions of material fact. The record in this proceeding simply does not provide a basis for the Commission to make a reasoned finding that the proposed VRR curve is just and reasonable and not unduly discriminatory or preferential. Rather than summarily accepting PJM’s filing in the face of these shortcomings, I would instead set the issues for hearing in order to develop the record needed to adequately address them."

Glick stated, "Today’s order approves the use of a combustion turbine power plant configured with one GE Frame 7HA turbine as the reference resource over considerable evidence (including from PJM’s own consultant) indicating that it is unjust and unreasonable to make a combustion turbine the reference resource rather than a combined cycle unit ... A Net CONE value that is consistently above that price will frustrate the economic theory on which the PJM capacity market is based, calling into question whether the market produces just and reasonable results. The reference resource used to establish Net CONE is, therefore, critical to determining whether the VRR curve is just and reasonable."

Glick stated, "I also want to respond to the significant concerns raised about PJM’s use of a 3-year historical rolling average for the establishment of the E&AS offset. While PJM’s current tariff requires this approach, the record here highlights its significant drawbacks. As the Market Monitor observes, historic revenue is always wrong. This is particularly true during periods, like today, where the industry is undergoing a significant change to the resource mix and market design. Brattle has recommended that PJM explore the use of a forward-looking E&AS offset in each of its studies of the VRR Curve. In the 2018 review, as in past reviews, it concluded that forward-looking estimates of E&AS revenues would yield a VRR curve that meets reliability objectives more effectively than relying on historical estimates. I encourage PJM and its stakeholders to initiate a process to develop a forward-looking methodology for determining E&AS revenue estimates. Utilizing forward curves for power and gas is consistent with project valuation methods used by market participants and allows energy market design changes to be more readily incorporated into the capacity market."

Tags:
PJM   Capacity Market  

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