By Dominic DiBari and Melissa Reynolds, Black & Veatch
On June 9, The Federal Energy Regulatory Commission (FERC) largely accepted PJM’s Capacity Performance (CP) Filing of Dec. 12, 2014, as amended in April 2015.
This ruling establishes a means to address the unprecedented forced outage rate experienced by power generators across the regional transmission organization’s footprint during the 2014 Polar Vortex. PJM brought about the action after nearly one-quarter of the generation assets (22 percent) in PJM were unavailable to deliver power due to the impacts of extended cold temperatures.
As a result of the initial filing, PJM delayed the May 2015 base residual auction (BRA), for the 2018/2019 delivery year to August 2015. Unlike previous auctions, the upcoming auction requires a CP resource to be capable of sustained, predictable operation and be available to provide energy and reserves whenever PJM determines an emergency condition exists. Emergency conditions typically occur when assets trip and go offline or when load comes in at unexpectedly high levels, frequently due to extreme weather conditions.
Payments for CP are expected to rise accordingly with the requirement that generating resources essentially be able to provide energy for the entire delivery year at any time. Unavailability of natural gas due to curtailment or nomination issues will not be a force majeure event that previously excused the asset’s unavailability from being classified as a forced outage.
Recognizing the complexity of generation assets, the order provides a means to transition the capacity market so that by [2020/2021] all generation resources will satisfy CP requirements. Should the operator fail to be available, they would be exposed to significant penalties that could diminish capacity revenues and overall asset value.
This new, more stringent penalty structure means that, for many units, a significant portion of their once stable capacity revenues will now be at risk unless investments are made to enhance fuel security, reliability, and unit flexibility. Penalties will be assessed in an hourly manner with an annual cap as explained by the following example:
Hourly non-performance penalty
In some areas of PJM where the Net Cost of New Entry (CONE) is $300/MW-Day this penalty can equate to a rate of $3,650/MWh for non-performance. Assuming a Balancing Ratio of 85%, and a unit with a commitment of 100 MW is not online during an Emergency Action this would equate to a penalty of $310,000 in a single hour.
Annual non-performance penalty cap
Using the same assumptions in the above example, a unit with a 100MW commitment could be exposed to penalties of approximately $16,000,000 per year ($300/MW-Day Net CONE x 1.5 x 365 Days x 100 MW)
Black & Veatch expects that implementation of CP will necessitate investment by generators in PJM to improve unit performance by enhancing fuel security, reliability, and operating parameters. Generators with the highest potential exposure to CP penalties include single fuel gas-fired units or coal units with gas start-fuel in eastern and central PJM along with units needing longer start times.
With the significant interest in the how CP impacts the PJM market, it is expected that all stakeholders will monitor this issue closely.
Melissa Reynolds and Dominic DiBari are managers with Black & Veatch’s Management Consulting business.
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