Court Affirms PJM’s Capacity Performance Program
July 5, 2017
On June 20, 2017, the U.S. Court of Appeals for the D.C. Circuit (“Court”) upheld the Federal Energy Regulatory Commission’s (“FERC”) approval of PJM Interconnection, L.L.C’s (“PJM”) rules governing their revised resource adequacy electricity capacity market rules. The Court rejected challenges on eight separate grounds raised by nine different organizations, including environmental, public utility, and clean energy groups.
PJM introduced the new rules in 2014 to ensure that all resource providers who participated within their capacity market could reliably deliver their promised quantity of electricity at all times. To that end, PJM introduced year-round requirements, bonuses for producing additional electricity during emergencies and stiff penalties for failures to deliver the promised amount of electricity. Critics of these rules argued that the rules discriminated against clean energy sources, increased costs, inhibited market participation, and violated procedural rules. FERC approved the rules, which PJM described as “Capacity Performance” rules, in 2015.
The Court largely deferred to FERC’s reasoning for their decision, and stated that the new rules might lead to substantial net savings. However, the Court noted that a finding of net savings was not necessary for approval of the new rules, as even a net increase in costs could be justified by an increase in system reliability.
The “essential attribute” of PJM’s proposed rule changes was the requirement that resources be able to deliver a consistent level of electricity for the entire 12 months, rather than offering different capacity during different periods. Under this requirement, resources whose capacity fluctuated with the seasons, such as solar and wind power, could only offer the capacity level of their weakest season as their annual bid. In an effort to mitigate this problem, FERC allowed seasonal resources to aggregate their output into a single offer, theoretically allowing for the strong seasons of one resource to complement the weak seasons of the other.
Environmental groups argued that the year-round requirement unduly discriminated against seasonal resources by imposing a disparate burden upon them. They pointed out that seasonal fluctuations are inherent in most clean energy generation resources. The groups also argued that the option to aggregate was insufficient to alleviate this burden, in part because aggregation required “transactional costs” that were not present in traditional bids.
The Court found that the year-round requirement disadvantaged seasonal resources but did not unduly discriminate against them. The Court noted that imposing a uniform rule upon differently situated participants did not necessarily constitute undue discrimination. “The law provides no basis to claim the commission cannot approve uniform performance requirements simply because those requirements will be easier to satisfy for some generators than for others.” The Court found that requiring a consistent level of capacity year-round was a judgment of market requirements that required deference, not “an undue privileging of one resource’s costs over another’s.”
The Court also found that the “disparate effect on non-year-round resources is mitigated by their ability to make aggregated capacity offers.” The Court noted that even if this aggregation did impose the claimed transactional costs, it is an accommodation rather than a requirement.
The Advanced Energy Management Alliance (“AEMA”) also objected to PJM’s plan to use two different formulas for calculating the expected consumption of demand resources in the summer and non-summer months. AEMA supported the use of the “peak load contribution” formula during the summer, but opposed the use of a different formula outside of summer months. The Court also found the use of the alternative formula to be reasonable, and thereby deferred to FERC’s decision to approve it.
Five organizations objected to PJM’s introduction of a default cap on the rate of submitted offers on the grounds that it would unreasonably increase the price of capacity. Rates below the cap are presumed under Capacity Performance to be cost-based, and are thereby permitted at auction, while rates above it will only be admitted into the capacity auction if PJM determines the rate to be cost-based. The Court found that “increased capacity prices are necessary” in order for resource owners to “recover the cost of improvements” that increase reliability. The Court also noted that the price of capacity will not necessarily reach the cap, and that new penalties would discourage resource owners from making capacity offers they cannot keep.
The Court’s decision in this proceeding confirmed that seasonal resources, such as summer air conditioning demand response, will face a difficult time in competing with fossil- fueled generation resources in PJM. The decision also clarified many important issues regarding PJM’s Capacity Performance program and re-affirmed FERC’s authority to approve PJM’s proposals in this area of RTO operations.
This Eckert Seamans Energy Blog is intended to keep readers current on matters affecting businesses and is not intended to be legal advice. If you have any questions, please contact Charlie Zdebski at (202) 659-6605 – czdebski@eckertseamans.com.