MOPR Self-Supply Exemption Review of Net-Short & Net-Long Thresholds

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1 MOPR Self-Supply Exemption Review of Net-Short & Net-Long Thresholds Jeff Bastian Manager, Capacity Market Operations Markets & Reliability Committee June 27, 2016

2 Minimum Offer Price Rule (MOPR) MOPR provisions of Section 5.14(h) of Attachment DD are intended to prevent price suppression by uncompetitively low new entry offers A minimum offer price is applicable to any CT, CC or integrated gasification CC resource (or uprate to any such resource) greater than 20 MW that has not yet cleared in a prior RPM auction A MOPR applicable resource may offer below the MOPR floor price if it qualifies for one of three MOPR exemption types: self-supply, competitive entry, or unit-specific 2

3 Self-Supply Exemption The self-supply exemption is applicable to self-supply LSEs (Single Customer Entity, Municipal/Cooperative Entity, or Vertically Integrated Utility) that meet certain net-short and net-long criteria The self-supply exemption requires a comparison between an LSE s capacity obligation and its owned and contracted capacity, and specify thresholds for the maximum acceptable amount by which an LSE could be short or long on capacity and still receive the self-supply exception Thresholds were developed with intent to reasonably balance the need to protect the market against price suppression with the need to accommodate normal business operations of self-supply LSEs 3

4 Net-Short Thresholds Net-short thresholds are levels at which an uneconomic new entry strategy could become profitable (i.e., benefit to an LSE of a clearing price reduction for its capacity purchases outweighs the cost to the LSE of a new generating unit that is offered at an uneconomic price) 4

5 Net-Long Thresholds Net-long thresholds limit a self-supply entity from substantially overbuilding while recognizing that the addition of a large resource that may be efficiently sized to accommodate the LSE s long-term needs may put the LSE in a net long position at the beginning of the resource s life 5

6 Required Periodic Review of Maximum Net-Short and Net-Long Positions Section 5.14(h) requires periodic review of net-long and net-short thresholds: Beginning with the Delivery Year that commences June 1, 2020, and continuing no later than for every fourth Delivery Year thereafter, PJM shall review the Maximum Net Short and Net Long positions Such review may include, without limitation, analyses under various appropriate scenarios of the minimum net-short quantities at which the benefit to an LSE of a clearing price reduction for its capacity purchases from the RPM Auction outweighs the cost to the LSE of a new generating unit that is offered at an uneconomic price, and may, to the extent appropriate, reasonably balance the need to protect the market with the need to accommodate the normal business operations of Self-Supply LSEs 6

7 Required Periodic Review of Maximum Net-short and Net-long Positions (cont.) Based on the results of such review, PJM shall propose either to modify or retain the existing Maximum Net-Short and Net-Long positions If PJM proposes to modify the Net-short and/or the Net-long positions, PJM must post publicly and solicit stakeholder comment regarding the proposal If, as a result of this process, changes to the Maximum Net-Short and/or Net-Long positions are proposed, the Office of the Interconnection shall file such modified Maximum Net-Short and/or Net-Long positions with the FERC by October 1, prior to the conduct of the BRA for the first Delivery Year in which the new values would be applied 7

8 PJM Review and Recommendations PJM has reviewed existing maximum net-long and net-short thresholds and recommends that the existing thresholds be retained The review included analyses under various scenarios of the minimum net-short quantities at which the benefit to an LSE of a clearing price reduction for its capacity purchases outweighs the cost to the LSE of a new generating unit that is offered at an uneconomic price Analysis conducted in 2012 to support the existing thresholds was updated to reflect the Net CONE values, VRR Curves and supply curves of the 2018/19 BRA Analysis details contained in appendix section of this presentation Updated analysis results confirm that existing net-short thresholds provide reasonable range to protect against self-supply LSEs from economically benefitting from a strategy of using a new resource to artificially suppress price for their net-short position 8

9 PJM Review and Recommendations (cont.) While there is seemingly little financial incentive to do so, the net-long threshold acts to limit an LSE with a relatively large amount of excess capacity from unloading new entry capacity on the RPM auction pushing down capacity prices in the process Net-long thresholds limit a self-supply entity from substantially overbuilding while recognizing that the addition of a large resource that may be efficiently sized to accommodate the LSE s long-term needs may put the LSE in a net long position at the beginning of the resource s life PJM recommends that existing net-long thresholds be maintained since they provide a reasonable limit to the quantity that an LSE can offer relative to its capacity obligation at uncompetitive low prices while recognizing that a new resource may put the LSE in a net long position at the beginning of the resource s life 9

10 Appendix Net-Short Analysis

11 Net-short Analysis Methodology - Overview PJM assessed the potential benefit to an LSE of an uneconomic new entry strategy by analyzing the impact of adding hypothetical uneconomic new entry offers (at $0 per MW-day) from representative combustion turbine and combined cycle plants on the RPM clearing prices from the most recent RPM Base Residual Auction. By using the actual VRR Curves that were applicable in the most recent BRA, as well as the actual supply offers for that auction, and the RPM clearing software used in that auction, this analysis provides an accurate assessment of the impact of potential uneconomic new entry on the RPM clearing prices. Use of the most recent BRA results also ensures that the analysis reflects the latest PJM market rules. 11

12 Net-short Analysis Methodology - Overview Analysis was performed for each relevant LDA that had a separate VRR Curve in the 2018/2019 Base Residual Auction ( BRA ), i.e., the MAAC, EMAAC, SWAAC, COMED, and ATSI LDAs, and for the unconstrained portion of the PJM Region from that auction. While a few other LDAs (i.e. PEPCO, DPL South, PS North, PS, PPL and BGE) also had separate VRR curves defined for that auction, these LDAs add little to a forward looking assessment of the Self-Supply LSE net short thresholds either because the LDA contains no vertically integrated utilities or significant sized public power entities, or because the LDA did not clear separately in the BRA or any of the the BRA scenarios. 12

13 Net-short Analysis Methodology - Scenarios For the purposes of this analysis, scenario analyses that are based on actual auction simulations and are publicly posted, were utilized to evaluate price impacts of uneconomic offers. For the 2018/2019 BRA, these posted sensitivity scenarios included simulations of uneconomic entry, offered at $0, in the PJM Region and various LDAs. 13

14 Net-short Analysis Methodology New Entry Resources Typical approximate values were used for the types of plants to which MOPR will apply, i.e., a 150 MW combustion turbine plant and a 600 MW combined cycle plant. This approach promotes a more robust analysis by considering the effects of both a smaller resource and a larger resource. These specific new entry amounts, i.e., 150 MW and 600 MW, were not studied in the sensitivity analyses performed last year, but these amounts are within the range defined by the various new entry amounts that PJM did analyze, and the relationship between the added MWs of new entry and the resulting prices was objectively linear. PJM therefore derived the clearing price impacts of 150 WM or 600 MW uneconomic new entry by linear interpolation of the results of last year s analyses. 14

15 Net-short Analysis Methodology New Entry Resources The per-mw/day competitive cost of such new entry resources was determined by applying the CT and CC cost elements stated in the Tariff for use in the VRR Curve and in the MOPR. The uncompetitive offer for such resources was assumed to be zero, since that type of offer would provide the greatest benefit to an LSE seeking to suppress price, and because an LSE that successfully obtains a Self- Supply Exemption under the proposed MOPR is permitted to offer at a price as low as zero. 15

16 Net-short Positions In the tables below, the LSE s costs if it offers the uneconomic new entry consist of its cost to deliver the new entry resource (MWs times the per MW-day competitive cost for the resource Column J), plus the cost of buying RPM capacity for its self-supply increment at the RPM clearing price that was reduced by the LSE s uncompetitive new entry (Column I). The LSE s total costs if it does not submit an uncompetitive new entry offer (Column H) are subtracted from its costs if it does submit an uncompetitive new entry offer (Column K). A negative number indicates a strategy that is profitable, i.e., the LSE s total costs are lower with the new entry offer (Column L). 16

17 Net-short Positions - RTO A negative value in column L indicates a profitable strategy. 17

18 Net-short Positions - RTO An uneconomic offer for a new 150 MW CT would begin to be profitable at a net-short position between 17,850 MW and 18,350 MW (rows 1 & 2) and an uneconomic offer for a new 600 MW CC would begin to be profitable at a net-short position between 15,900 MW and 16,400 MW (rows 3 & 4). The fifth row confirms a net-short level of 1,800 MW, which is the maximum permissible net-short level for a multi-state public power LSE in PJM, is not profitable. The sixth row confirms a net-short level of 4,000 MW, which is 20% of the approximate size of the largest vertically integrated utility LSE in PJM, is also not profitable. Thus, these thresholds are within a reasonable range to protect the market from uneconomic new entry incentives in the unconstrained RTO area. 18

19 Net-short Positions - MAAC A negative value in column L indicates a profitable strategy. 19

20 Net-short Positions - MAAC An uneconomic offer for a new 150 MW CT would begin to be profitable at a net-short position between 11,850 MW and 12,350 MW (rows 1 & 2) and an uneconomic offer for a new 600 MW CC would begin to be profitable at a net-short position between 5,900 MW and 6,400 MW (rows 3 & 4). The fifth row confirms a net-short level of 1,800 MW, which is the maximum permissible net-short level for a single-state public power LSE in MAAC, is not profitable. Thus, this threshold is within a reasonable range to protect the market from uneconomic new entry incentives in the MAAC LDA. 20

21 Net-short Positions - EMAAC A negative value in column L indicates a profitable strategy. 21

22 Net-short Positions - EMAAC An uneconomic offer for a new 150 MW CT would begin to be profitable at a net-short position between 1,850 MW and 2,350 MW (rows 1 & 2) and an uneconomic offer for a new 600 MW CC would begin to be profitable at a net-short position between 900 MW and 1,400 MW (rows 3 & 4). The fifth row confirms a net-short level of 1,000 MW, which is the maximum permissible net-short level for a single-state public power LSE in EMAAC, is profitable. However, because none of the single-state LSEs in EMAAC are large enough to ever have a net-short position of 1,000 MW, this threshold is within a reasonable range to protect the market from uneconomic new entry incentives in the EMAAC LDA. 22

23 Net-short Positions - SWMAAC A negative value in column L indicates a profitable strategy. 23

24 Net-short Positions - SWMAAC An uneconomic offer for a new 150 MW CT would begin to be profitable at a net-short position between 1,850 MW and 2,350 MW (rows 1 & 2) and an uneconomic offer for a new 600 MW CC would begin to be profitable at a net-short position between 900 MW and 1,400 MW (rows 3 & 4). The fifth row confirms a net-short level of 1,000 MW, which is the maximum permissible net-short level for a single-state public power LSE in SWMAAC, is not profitable. Thus, this threshold is within a reasonable range to protect the market from uneconomic new entry incentives in the SWMAAC LDA. 24

25 Net-short Positions - COMED A negative value in column L indicates a profitable strategy. 25

26 Net-short Positions - COMED An uneconomic offer for a new 150 MW CT would begin to be profitable at a net-short position between 3,350 MW and 3,850 MW (rows 1 & 2) and an uneconomic offer for a new 600 MW CC would begin to be profitable at a net-short position between 2,400 MW and 2,900 MW (rows 3 & 4). The fifth row confirms a net-short level of 1,800 MW, which is the maximum permissible net-short level for a single-state public power LSE in COMED, is not profitable. Thus, this threshold is within a reasonable range to protect the market from uneconomic new entry incentives in the COMED LDA. 26

27 Net-short Positions - ATSI A negative value in column L indicates a profitable strategy. 27

28 Net-short Positions - ATSI An uneconomic offer for a new 150 MW CT would begin to be profitable at a net-short position between 17,850 MW and 18,350 MW (rows 1 & 2) and an uneconomic offer for a new 600 MW CC would begin to be profitable at a net-short position between 15,900 MW and 16,400 MW (rows 3 & 4). The fifth row confirms a net-short level of 1,000 MW, which is the maximum permissible net-short level for a single-state public power LSE in ATSI, is not profitable. Thus, this threshold is within a reasonable range to protect the market from uneconomic new entry incentives in the ATSI LDA. 28