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Is Capacity Market Participation Still Viable For Intermittent Resources Under Capacity Performance?

PJM established its Capacity Market in 2007 to ensure long-term electric grid reliability by providing an additional revenue stream for generators that are available to meet future peak energy demand. The Capacity Market construct, called the Reliability Pricing Model (RPM), has undergone changes throughout the years in order to keep incentives and outcomes aligned with the focus on reliability as market conditions and resource technologies have shifted.

05 / 11 / 2017 Power Alan Southworth, Portfolio Manager

PJM established its Capacity Market in 2007 to ensure long-term electric grid reliability by providing an additional revenue stream for generators that are available to meet future peak energy demand. The Capacity Market construct, called the Reliability Pricing Model (RPM), has undergone changes throughout the years in order to keep incentives and outcomes aligned with the focus on reliability as market conditions and resource technologies have shifted. The 2014 Polar Vortex, in particular, raised concerns about generator performance during extreme weather conditions. Notably, on January 7, 2014, up to 22 percent of PJM’s total capacity experienced forced outages (compared with a historical average of seven percent). The extreme winter of 2014, along with other market factors, led to a significant change in market design called Capacity Performance.

Effective with the 2018-19 Delivery Year, PJM implemented new Capacity Performance rules associated with generator assessment during power system emergencies. During the first two Delivery Years under the Capacity Performance rules, PJM procured two capacity product types through RPM auctions called Base Capacity Resources and Capacity Performance Resources. However, beginning with the 2020-21 Delivery Year, Base Capacity Resource procurement will be phased out entirely, and any resource wishing to participate in an RPM auction will be assessed as a Capacity Performance Resource. This transition to 100 percent Capacity Performance Resource procurement by PJM comes with additional upside for certain generators and additional risk for others.

During the Capacity Performance transition years (DY 2018-19 and 2019-20), Base Capacity Resources will be exposed to non-performance charges for under-performance only during relevant Emergency Procedure events that occur between June and September. Meanwhile, Capacity Performance Resource commitments will be assessed during all Emergency Procedure hours throughout the entire Delivery Year.

For intermittent capacity resources in particular, being treated as a Capacity Performance Resource is likely bearish for capacity revenues because of the new Performance Assessment Hour structure, which treats all resources on an even playing field during Emergency Actions, regardless of generation technology. In other words, if the sun is not shining or the wind is not blowing when an Emergency Action is announced, solar and wind resources with a Capacity Commitment could be hit with a significant under-performance penalty.

So how do the penalties and bonuses work under Capacity Performance? In essence, the under-performing resources are paying the over-performing resources for maintaining grid reliability during Emergency Action hours. Let’s take a deeper dive into how these penalties and bonuses are calculated.

For each Performance Assessment Hour (PAH), a few key metrics come into play when determining whether a resource will be assessed a penalty or receive a bonus.

  • Actual Performance: the resource’s actual generation during the PAH
  • Expected Performance:

 expected performance equation

  • Performance Shortfall: Expected Performance – Actual Performance

  • Non-Performance Charge:

    • Capacity Performance Resources:
      non-performance charge, capacity performance resources

    • Base Capacity Resources:
      non performance charge, best capacity resources
  • Annual Stop-loss:
    • Capacity Performance Resources:
      na_power_gpblog_equation4.JPG
    • Base Capacity Resources: Total capacity revenues for the resource
      • i.e. At worst, capacity revenues will be zero if the calculated non-performance penalties would cause overall capacity revenue to be negative

It is important for generators to understand these new Capacity Performance rules to properly account for the additional risk and/or upside when entering the 2020-21 Base Residual Auction between May 10 to 16, 2017. Specifically, if a resource is likely to under-perform during peak usage periods, the owner could be in for big penalties that could severely hurt the Capacity Market bottom line and even lead to a net payment to PJM for clearing megawatts (MWs) in the auction that could not be generated when it mattered most. For more information or a consult on your generation resources in PJM, contact info@gprenew.com.

Please note that all reports, summaries and other work product relating to client portfolios provided by GP Energy Management LLC (whether previously, now or in the future) are based solely and exclusively on data provided by such client and that GP Energy Management LLC hereby disclaims any liability and makes no representation or warranty as to the accuracy, truth and correctness of the data contained therein.

GP Energy Management, a wholly-owned subsidiary of Genscape, Inc., is a registered commodity trading advisor (CTA) with the Commodity Futures Trading Commission and is a member of the National Futures Association. GP Energy Management provides a wide range of energy services, including energy management, consulting, and commodity risk and operations support, to its customers.