FERC Approves Quadrennial Review Proposal

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The Federal Energy Regulatory Commission has approved PJM’s petition to update the parameters used to procure resources to meet PJM’s reliability needs in capacity market auctions.

The Commission’s Feb. 14 order completes a PJM Tariff-required process, the Quadrennial Review, conducted every four years.

This Quadrennial Review proposal was developed in concert with stakeholders and an independent consultant, the Brattle Group, in a year-long process. Historically, stakeholders provided feedback only after the consultant study was complete. For the first time, for this Quadrennial Review, PJM invited stakeholder feedback and collaboration with Brattle throughout the process.

The process reviews both the shape of the Variable Resource Requirement (VRR) Curve and inputs used for the curve. The VRR Curve, in combination with the supply curve formed from capacity supplier offers in the capacity auction, is used to determine the level and price of capacity procured in PJM’s capacity market, called the Reliability Pricing Model.

Those inputs into the VRR include the gross and net Cost of New Entry (CONE) of the Reference Resource and expected net Energy and Ancillary Services (E&AS) Offset. These factors establish the expected costs that an investor would have to recover to make investment in a new resource profitable.

The approved proposal updates the Reference Resource – a theoretical generation resource used to estimate the cost for new generation to enter the system – from combustion turbine to combined cycle. The Reference Resource is an input to the gross CONE.

The net CONE is established by subtracting the E&AS revenues that the Reference Resource can be expected to earn from the gross CONE.

The proposal also changed the methodology for determining the E&AS Offset to one that looks at anticipated future revenues rather than historical E&AS revenues.

The new VRR Curve is an improvement on the prior VRR Curve as it reduces the potential for over-procurement, maintains reliability in excess of the reliability standard, and only modestly increases expected year-over-year capacity price volatility.

FERC found that the revised VRR Curve meets reliability requirements at a reasonable cost while incentivizing investment in new generation resources. The FERC-approved changes will be in effect beginning with the capacity auction for the 2026/2027 Delivery Year, scheduled for November 2023.