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FERC May Let Discrete Load Avoid Capacity Market, Allocation To Retail Suppliers Key

July 02,2018

In an order in which FERC found PJM's existing capacity market minimum offer price rule (MOPR) to be unjust and unreasonable (and found various proposed changes to the MOPR as not having been proven to be just and reasonable), FERC has proposed to accommodate a state's procurement of capacity outside of the PJM capacity auction by excluding such capacity from the PJM auction but also excluding an associated amount of load related to the state-procured resource from the capacity market, so that such load does not pay for capacity twice.

If ultimately adopted by FERC, this mechanism creates a new need for such load, free from the capacity market purchase obligation, to be equitably allocated among LSEs, including retail suppliers. Most, but not all, states that are subsidizing resources have done so through distribution utility payments, not payments from LSEs (default service suppliers and retail suppliers), with the notable exception being the New York ZEC program (not directly applicable in the instant PJM case). As such, any load "freed" from the capacity market purchase obligation due to a state resource will need to be identified, assigned, and tracked, due to customer migration

FERC noted that an issue to be addressed further in a paper hearing process set forth in the order to develop its proposal is, "How to identify the load that will be removed from the PJM capacity market auction in connection with resource owners choosing the resource-specific FRR Alternative. This is an important issue because the load associated with each such resource will not have an obligation to purchase capacity from the auction. In addition, we request comments on whether part of a resource should be eligible for the new resource-specific FRR Alternative, as well as how to address resources with split ownership."

Notably, this new mechanism proposed by FERC would not, for LSEs, require an "all-in/all-out" decision as the current Fixed Resource Requirement (FRR) alternative to the capacity market does, which, due to its all-in nature and the vagaries of future demand (due in part to customer migration) has not been a workable alternative to the PJM centralized capacity market

FERC's order would expand the MOPR to apply to state-subsidized resources not currently captured by the current gas-fired only MOPR

Regarding the exemption from the capacity market for load associated with a state-procured resources, FERC said, "We also preliminarily find that it may be just and reasonable to accommodate resources that receive out-of-market support, and mitigate or avoid the potential for double payment and over procurement, by implementing a resource-specific FRR Alternative option. We therefore propose that PJM adapt its current FRR option to allow, on a resource-specific basis, resources receiving out-of-market support to choose to be removed from the PJM capacity market, along with a commensurate amount of load, for some period of time. The resource-specific FRR Alternative would accommodate such resources by allowing them to remain on the system, despite their inability to compete in the capacity market based on their costs, by permitting them to exit the capacity market with a commensurate amount of load and operating reserves (we seek comment on the best method of accounting for both the load and reserves, below). Resources and load that take advantage of this new resource-specific FRR Alternative would not participate in the PJM capacity market, and would neither make nor receive payments from that capacity market. However, those resources and their associated load would continue to participate in the energy and ancillary services market, as is the case under the current FRR construct. Unlike the current FRR construct, the resource-specific version would not require a load-serving entity to remove its entire footprint from the capacity market; rather it would remove a specific resource (and accompanying load). However, we note that we are not proposing that PJM remove the existing FRR construct, which allows load-serving entities to exit the capacity market on a utility-wide basis.

"A resource receiving out-of-market support would not be prohibited from participating in the capacity market, but would be subject to the expanded MOPR, should it choose to offer into the market. In this manner, the resource-specific FRR Alternative would accommodate policies to provide out-of-market support to certain resources, but remove those resources from the market. This would essentially create a bifurcated capacity construct – resources receiving out-of-market support and a commensurate amount of load would be outside of the PJM capacity market, thereby increasing the integrity of the PJM capacity market for competitive resources and load," FERC said

"In addition to increasing the integrity of the capacity market and allowing resources that receive out-of-market support to remain in PJM’s energy and ancillary services markets, and continue to be recognized as capacity on the system, we expect this bifurcated approach to provide significant benefits through increased transparency for investors, consumers, and policymakers. Though the capacity market side of the bifurcated capacity construct will be relatively smaller, the expanded PJM MOPR will ensure that all resources participating in the capacity market, whether or not these resources receive out-of-market support, offer competitively. Further, the bifurcated capacity construct should make more transparent which capacity costs are the result of competition in the capacity market and which capacity costs are being incurred as a result of state policy decisions. Finally, depending on how load is selected for the new resource-specific FRR Alternative, this capacity construct should help confine the cost of a particular state policy decision to consumers within the state that made that policy decision, whereas the status quo requires consumers in some PJM states to subsidize the policy decisions of other PJM states," FERC said

FERC's order was 3-2, with Commissioners LaFleur and Glick dissenting. Commissioner Powelson, who is departing FERC soon, concurred with the order.

FERC   PJM   Capacity Markets  

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