PJM seeks a middle course in capacity markets

PJM is the regional grid operator that operates in states from the Mid-Atlantic region to Illinois, and uses a Reliability Pricing Model (RPM) for its capacity market auctions. The grid operator has had concerns about the impact of subsidies, particularly state-level subsidies and directed policies, on power generation that operates in its federally regulated wholesale markets. The concerns was expressed in a letter by PJM President and CEO Andrew L Ott. This concern was about power capacity, not energy or related services.

A task force was charged with coming up with an equitable solution. The initial choices tended to either paint all subsidies with the same, broad, market distorting brush, or treat all subsidies as acceptable market mechanisms. Instead, a more nuanced approach was offered in a proposal that would determine whether capacity prices offered in an auction would need to be repriced. This would be a change from the Minimum Order Price Rule, which only applied to new capacity, to a capacity repricing approach that would address both new and existing resources.

The process to determine repricing after the initial auction would employ a multi-step decision tree that would either call for no action, or trigger a repricing. The first step in the process is whether the capacity resource being offered is owned or contracted to a vertically integrated utility (most utilities in PJM’s territory are disaggregated), or a municipal or cooperative utility. If the answer is yes, then no further action is required, no repricing is triggered.

Next stage, is the subsidy a federal program, like the Solar Investment Tax Credit? If yes, then no further action required, because federal subsidies are considered broader and more generic in scope across the entire market. This may not be the case for a state subsidized program. Next, is the subsidy a direct focus supply side participation? If no, then no action. Is the total resource less than 3,000 MW of subsidized unforced capacity in PJM? If yes, no action. Lastly, is the subsidy amount greater than 1% of actual or anticipated revenues? If no, then no action.

Under this proposal, a resource that comes in at $40/Megawatt-day, the metric used for capacity markets, and clears the auction, may have a subsidy that triggers a repricing to, say, $45/MW-day, which may or may not take it out of the running. PJM is recommending that the proposal be filed with the Federal Energy Regulatory Commission in February 2018, requesting an effective date for this filing after the Base Residual Auction in May 2018.