FERC Rejects PJM ELCC Proposal Based on Transition Mechanism; Establishes Paper Hearing Procedures

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On April 30, 2021, FERC rejected PJM Interconnection, L.L.C.’s (“PJM”) proposed revisions to both its Tariff and its Reliability Assurance Agreement (“RAA”) to implement an Effective Load Carrying Capability (“ELCC”) construct for determining capacity values for Variable Resources, Limited Duration Resources, and Combination Resources. PJM also proposed to update its capacity value analysis annually based on variations in resource deployment and load. To account for changes in capacity values from one year to the next, PJM had proposed a transition mechanism that would establish ELCC floor values for resources on a rolling annual basis for 13 years after they enter the PJM capacity market. FERC rejected PJM’s ELCC proposal, finding the proposed transition mechanism to be unjust and unreasonable. However, FERC found that aside from the transition mechanism, other portions of the ELCC framework appear to be just and reasonable for determining accredited capacity values. FERC lifted its previously-established abeyance on the paper hearing procedures addressing PJM’s capacity valuation method, and established a briefing schedule. FERC acknowledged that PJM is under no obligation to implement its ELCC proposal prior to the next Base Residual Auction (for Delivery Year 2022/2023), but emphasized that it “specified an expedient paper hearing schedule to investigate the justness and reasonableness of PJM’s existing capacity valuation methods as soon as possible.” Commissioner Christie issued a separate concurring statement.

FERC’s April 30 order follows an October 2019 order wherein FERC accepted PJM’s Order No. 841 electric storage compliance filing and instituted a proceeding to investigate whether PJM’s 10-hour minimum-run-time requirement for Capacity Storage Resources was unjust and unreasonable (see October 24, 2019 edition of the WER). In December 2019, PJM proposed revisions to its RAA to incorporate rules for determining capacity values for all generation resources. PJM subsequently filed a motion to hold the proceedings in abeyance in order to pursue an ELCC construct in its stakeholder process. FERC granted the petition in an April 2020 order, holding the proceedings in abeyance until October 30, 2020 (see April 17, 2020 edition of the WER). PJM subsequently submitted its ELCC proposal on October 30, 2020.

PJM’s October 30, 2020 filing defined three types of generators (collectively, “ELCC Resources”):

  1. Variable Resources: generation without output that varies as a function of its energy source, e.g., wind, solar, or run-of-river hydroelectric resources;
  2. Limited Duration Resources: generation not capable of running continuously at maximum output for 24 hours or longer, e.g., energy storage resources; and
  3. Combination Resources: generators that combine elements of Variable and Limited Duration Resources, e.g., solar-battery hybrid resources or hydropower with non-pumped storage.

Unlike “Unlimited Resources” (i.e., fossil-fuel based resources and nuclear resources that can maintain energy output through an operating day) that are assigned capacity values based on the generator’s maximum output capability adjusted based on historical unavailability over several years, PJM proposed to assign capacity values to ELCC Resources by determining an ELCC Class Rating for each resource class, with resources able to consistently produce energy during hours with a high risk that load exceeds supply obtaining a higher ELCC rating than generation resources less able to do so. Specifically, PJM proposed to calculate the Accredited Unforced Capacity (“UCAP”) of Variable Resources and Limited Duration Resources as the product of (1) the resource’s Effective Nameplate Capacity; (2) the applicable ELCC Class Rating, determined using probabilistic modeling to evaluate a generator’s contribution to system reliability and distinguishing among distinct “classes” of generators with differing levels of reliability, size, and hourly output profiles; and (3) the resource’s ELCC Resource Performance Adjustment. Similarly, PJM proposed to determine the Accredited UCAP for Combination Resources based on the sum of the component accreditations, while adjusting for the reliability value of the fully-fledged Combination Resource.

PJM also proposed to update the applicable capacity value analysis and accreditation annually. To account for changes in accredited capacity values from one year to the next, PJM proposed a transition mechanism that established ELCC Class Rating floors for ELCC Resources on a rolling annual basis for the 13 subsequent delivery years after they enter the PJM capacity market. PJM argued that the ELCC Class Rating floors would limit the effective uncertainty in future ELCC values by setting a conservative lower limit on the ELCC Class Rating used to calculate the Accredited UCAP of subject resources.

FERC rejected PJM’s ELCC proposal on the basis of the proposed transition mechanism, which it found to be unjust and unreasonable because it would discount the accredited capacity value of some ELCC Resources below their actual capacity value in order to value other ELCC Resources above their actual capacity value. Specifically, FERC found that if the floors established by the transition mechanism binds existing ELCC Resources, PJM would unjustly and unreasonably discount the capacity value of ELCC Resources that enter the market at a later date.

However, FERC noted that aside from the transition mechanism, PJM’s proposed ELCC construct appeared to be just and reasonable, allocating capacity values to generators using a logical and methodological process that reasonably estimates each generation resource type’s reliability contribution. FERC also lifted the abeyance of the hearing procedures to evaluate the justness and reasonableness of PJM’s capacity valuation rules, and established briefing deadlines of June 1, 2021 for PJM’s initial brief; June 22, 2021 for responses to PJM’s brief; and July 9, 2021 for reply briefs. FERC also directed briefing parties to answer specific questions, including whether PJM’s ELCC proposal is a just and reasonable method to determine capacity values absent the transition mechanism.

Commissioner Christie issued a separate concurring statement explaining his belief that PJM’s current ELCC proposal, while an improvement over the status quo, will be further improved in the hearing process. He encouraged parties to offer additional comment on how the ELCC construct can be made more accurate, and to address any post hoc reporting requirements that detail actual performance versus the ex ante ELCC values, how such data can be used to adjust values, and the functioning of performance penalties to ensure consumers are not forced to pay for capacity that turned out to be over-valued by the ELCC formula in actual performance.

FERC’s order, along with Commissioner Christie’s concurring statement, is available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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