PJM presents preliminary response to Quadrennial Review

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PJM provided stakeholders with its preliminary recommendations at the Market Implementation Committee on Wednesday in response to The Brattle Group’s Quadrennial Review of the Variable Resource Requirement curve used in the Reliability Pricing Model capacity auction.

PJM is required by its Tariff to conduct the Quadrennial Review prior to the May 2019 Reliability Pricing Model (RPM) Base Residual Auction.

The preliminary recommendations focused on ensuring PJM maintains adequate resources to meet reliability requirements at a reasonable cost.

Pat Bruno, senior engineer – Capacity Market Operations, outlined PJM’s response on the key components of the Quadrennial Review on:

  • Cost of New Entry (CONE)
  • Shape of the Variable Resource Requirement (VRR) Curve
  • Net Energy & Ancillary Services Revenue (EAS) Offset methodology

Cost of New Entry

PJM recommends the adoption of a GE Frame Model 7HA combustion turbine (CT) as the Reference Resource and updating CONE values using that technology (chart on page five).

The CT is representative of a peaking unit in the energy market that derives a significant portion of its revenues from the capacity market as compared to other resources. That reliance on capacity market revenues, in turn, promotes stable net CONE values since short-term energy revenue volatility has less of an impact than it does on other resources more reliant on energy market revenues. The CT also continues to have the lowest capital costs and shortest time to market.

The capacity markets in both the New York Independent System Operator and the Independent System Operator of New England employ a CT as the reference resource; the Federal Energy Regulatory Commission accepted the use of combustion turbine technology for the reference resource in both grid operators.

Shape of the VRR Curve

PJM recommends maintaining the current CT-based VRR curve shape for the RTO and locational deliverability areas (LDAs).

The Brattle analyses show that retaining the VRR Curve shape would maintain RPM performance and meet defined reliability and economic objectives.

This would apply to areas such as mitigation of price volatility; achievement of an average loss-of-load expectation (LOLE) of one event in 10 years for the system; and a 1-in-25 conditional LOLE in each modeled LDA. This is particularly important in the face of significant changes in market conditions, continued resource retirements and reduction in net CONE relative to the current value.

Energy & Ancillary Services Offset Methodology

The net energy and ancillary service offset is the estimated total revenues earned by the Reference Resource in the Energy Market and Ancillary Service Market, less the variable costs of providing energy and ancillary services. These net revenues – the EAS offset – are assumed to go toward covering the fixed capital and operating and maintenance costs of the Reference Resource to allow it to profitably enter PJM’s markets.

PJM is recommending a number of measures to ensure a more accurate EAS calculation.

  • Use median of zonal EAS offsets for the entire RTO and multi-zone locational deliverability areas
  • Update natural gas pricing hubs for six zones
  • Use sum of median monthly revenues for each zone
  • Include a 10 percent cost adder
  • Update reference resource characteristics and costs

Using the median provides a reasonable EAS offset for combustion turbines located within the LDA or RTO and dampens the influence of outliers when compared to the average. Updating the RTO methodology will also help ensure consistency between electricity and gas prices, and eliminate prices against which no actual resource would be dispatched.

There will be four additional special MIC meetings on the Quadrennial Review – June 1, June 22, July 6 and July 27.

PJM must file Tariff changes resulting from the review process with the Federal Energy Regulatory Commission by Oct. 1.