By Michael Gergen and Eli Hopson

In response to poor performance by many generation resources in the PJM region during the 2014 “Polar Vortex” and concerns over the increasing reliance on natural gas-fired generation resources in the PJM region, PJM filed under Section 205 of the Federal Power Act (“FPA”) proposed “Capacity Performance” rules to revise its capacity market, known as the “Reliability Pricing Model” or “RPM”, with the Federal Energy Regulatory Commission (“FERC” or “Commission”) on December 12, 2014.  In connection with its filing of proposed tariff revisions, PJM also filed under both Sections 205 and 206 of the FPA proposed revisions to its Operating Agreement which would narrow force majeure for non-performance.  PJM’s proposed revisions to its capacity market construct, if implemented, would present clean energy resources with new opportunities and risks regarding their participation in PJM’s capacity market, by, among other things, allowing participation by energy storage resources.

PJM’s filing of its proposed Capacity Performance rules follows months of stakeholder deliberation over various straw proposals, and the proposed rules as filed with FERC contain a number of significant differences from the proposal last considered in the stakeholder process. PJM’s goal is for its new Capacity Performance rules to go into effect April 1, 2015.  PJM’s proposed Capacity Performance rules are based in part on the ISO New England’s “Pay for Performance” rules, which FERC approved in mid-2014.  PJM’s proposed Capacity Performance rules would establish a new capacity product—Capacity Performance Resources—with higher performance standards that would likely earn significantly greater capacity market revenues. The revisions would also significantly increase financial penalties for Capacity Resources that have cleared in the RPM auctions and that fail to perform when called upon by PJM during certain emergency conditions on the PJM grid.  Moreover, the revisions would also add a new definition for “Capacity Storage Resources,” which would include hydroelectric, flywheel, and storage resources as well as a new definition of “Intermittent Resources” which would include “Generation Capacity Resources with output that can vary as a function of its energy source, such as wind, solar, run of river hydroelectric power and other renewable resources.”

PJM also proposes to limit instances of force majeure for Capacity Generation Resources to only include instances of “Catastrophic Force Majeure,” defined in the proposed revisions to the Operating Agreement as widespread failure of the transmission system or fuel delivery system in all of the PJM area. As a result, unexpected individualized or localized risks will no longer excuse non-performance, and the determination of whether an event satisfies the “Catastrophic Force Majeure” definition will be made independently by the Office of Interconnection, rather than by a market participant.

Capacity Performance Resources Expected to Perform During Emergency Action Periods

PJM’s proposed Capacity Performance rules would fundamentally change and significantly increase the expectation for performance by capacity resources as they would be expected to provide energy and reserves when called upon by PJM, though their performance (and associated financial charges and credits) under PJM’s proposed “no-excuse” standard for failure would be determined based on their operation during “Emergency Action” periods. Rather than imposing front-end eligibility requirements for resources wishing to enter the market as Capacity Performance Resources (as was previously contemplated by PJM on August 20th and October 7th, including multi-hour performance capability), the Capacity Performance rules proposed before FERC seek to put the onus on capacity market sellers to provide “reasonable assurances” that their resources will perform when called upon during Emergency Action periods, (which PJM assumes, but does not guarantee, will occur as much as 30 hours per year in the summer and winter seasons). Under the proposed Capacity Performance rules Capacity Performance Resources will be required to have combined start-up and notification times as well as minimum down times that do not exceed one hour. To increase market competiveness, PJM proposes to impose a must-offer requirement on all resources that qualify as Capacity Performance Resources beginning in the 2018/2019 Delivery Year, with limited exceptions. All resources that qualify as Capacity Performance Resources will not have the option of not submitting offers or submitting offers as Base Capacity Resources without facing penalties. At the same time, PJM proposes that Intermittent Resources, Capacity Storage Resources and Energy Efficiency Resources, may, but will not be required to, submit offers as Capacity Performance Resources.

Substantial Penalties for Failure to Perform During Emergency Actions

Capacity Performance Resources that fail to perform during Emergency Actions will have to pay substantial penalties. PJM has patterned its penalty structure after that of ISO New England’s “Pay for Performance” standard. Rather than factoring in a resource’s forced outage history in determining acceptable levels of performance for future years, PJM proposes to adopt a more stringent, “no excuses” policy that simply compares a resource’s actual performance during Emergency Action hours and subjects any and all performance shortfalls to a “Non-Performance Charge” as high as an annual stop-loss of 1.5 times Net CONE times all of the resource’s committed capacity (where Net CONE is the first year total net revenue that a new resource would need to recover its capital and operating expenses, net of any returns in PJM’s energy and ancillary services markets).  Although Net CONE varies based on the geographic region and the year, RTO-wide values for the 2017/2018 RPM auction were $351.39/MW-day.   Due to the proposed revisions to the Operating Agreement discussed above, the only acceptable excuse for non-performance will be if a resource is on a planned or maintenance outage pre-approved by PJM.  As PJM states in its filing letter, “the proposed Non-Performance will impose serious adverse financial consequences on resources that do not perform during emergencies” and could turn a seller’s “RPM revenue stream into an RPM expense stream if its resource performs poorly in multiple emergencies during the Delivery Year.”

Alternatively, resources that exceed expected performance will be eligible to receive “Performance Payments,” collected from revenues generated by Non-Performance Charges. Under the proposed Capacity Performance rules, all market participants are eligible to receive Performance Payments, including non-Capacity Resources that “stand in” for non-performing Capacity Resources outside of the resource’s obligation period, effectively rendering any performance during such periods bonus-eligible.

Phased Transition to New Market

PJM proposes to complete a market transition to a 100% Capacity Performance Resource product by the 2020/2021 Delivery Year. Until that time, a resource failing to meet the Capacity Performance Resource standard will continue to be eligible to participate as Base Capacity Resources.  With the exceptions discussed above for Intermittent Resources, Capacity Storage Resources and Energy Efficiency Resources, which will be able to participate as Base Capacity Resources also, all other resources that do qualify as Capacity Performance Resources will only be eligible to participate as Capacity Performance Resources. By the end of the transition period, all capacity resources will be expected to make the transition to the Capacity Performance Resource standard.  PJM also proposes that resources such as storage, wind, and solar to aggregate to submit Sell Offers with other Energy Efficiency Resources located within the same Locational Deliverability Area (“LDA”) as either Base Capacity Resources or Capacity Performance Resources.  While not entirely clear, it appears that the proposed revisions also seek to exempt from the must offer requirement for Base Capacity Resources those resources that are exempt from the must offer requirement for Capacity Performance Resources.

PJM has requested that the Commission accept its proposed Capacity Performance rules by April 1, 2015.  PJM also requested that the Commission establish an extended comment period, with a deadline of January 12, 2015 for stakeholders to submit comments (or 31 days from the date of PJM’s filing), however, the Organization of PJM States filed a Motion to extend the comment period to January 20, 2015 given the length of the PJM filings.