PJM Proposal for Incremental Auction Redesign
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1 PJM Proposal for Incremental Auction Redesign Jeff Bastian Manager, Capacity Market Operations Incremental Auction Senior Task Force May 31,
2 RPM Depends on Physical Resources RPM is designed to procure commitments of identifiable physical resources to meet resource adequacy needs three years forward Commitment to be physically available to PJM s dispatch either to produce energy or reduce consumption of energy at peak times or emergency conditions Long-term adequacy objectives depend on BRA sell offers that reflect physical resources well-grounded in reasonable expectations of physical delivery Uncertain BRA sell offers suppress and distort the price signal on the value of capacity that RPM is designed to provide Forward certainty on delivery of capacity resources is critical to ensuring long term reliability and an effective and efficient regional transmission planning process 2
3 Incremental Auction Purpose Existing and planned resources with full expectations of ability to satisfy physical delivery of 3-year forward BRA commitment may find a legitimate need to replace all or part of the commitment as a result of inability to physically deliver due to unforeseen circumstances Existing Generation impacted by deactivation, derating and/or final EFORd Existing DR impacted by final FPR and end-use customer PLC Planned resources impacted by delay or termination of resource development IAs provide a means for a seller that cannot honor its BRA commitment to avoid a deficiency penalty without impacting the level of capacity reserves committed in the BRA 3
4 Current IA Construct PJM Concerns Current IA construct including the number and purpose of the auctions and the prices offered by PJM and other sellers has created or has potential to create undesirable adverse outcomes Number of IAs and low IA clearing prices relative to BRA create an environment in which BRA sell offers can be made with confidence that the commitment can be replaced via an IA with little likelihood of economic loss and in fact a high likelihood of profit May encourage BRA sell offers having little or no reasonable expectation of physical delivery Detrimental to RPM s long-term reliability objective by suppressing BRA clearing prices, potentially forcing out resources that otherwise would have cleared the auction to leave the market, and discouraging new entry at the true cost of capacity 4
5 Current IA Construct PJM Concerns (cont.) PJM s capacity sell-back price in IAs based on updated VRR Curve Decrement can require PJM to release capacity at a fairly low price relative to the BRA clearing prices; often offering significant quantities at zero PJM s pre-determined and posted capacity sell-back price may encourage some sellers to undercut the PJM sell-back price in order to increase chances of clearing PJM s capacity sell-back price in IAs provides very little value back to load relative to the cost to load of the initial BRA procurement or the value to load of otherwise committed resources Low thresholds on PJM participation in IAs on behalf of load can result in overreaction to load forecast changes in either direction potentially leading to irrational and inefficient PJM participation with PJM buying in one IA, selling in the next IA and buying again in the final IA (or vice versa) 5
6 Current IA Construct PJM Concerns (cont.) Sellers can choose to buy out of BRA commitment in any one of three IAs providing three separate chances to successfully shop a BRA commitment at a low IA price Voluntary demand for replacement capacity is spread among the three IAs while, by contrast, majority of supply is from existing generation that failed to clear the BRA and is required to offer and subject to mitigation in each IA or existing generation that failed to clear the BRA, chose not to retire despite not clearing and now seeking to clear at any price Three-IA structure provides a seller with four auctions for a delivery year to engage in repeated sales and buy-backs of the same MWs for a single delivery year (this concern has been substantially mitigated through recent Manual 18 revisions regarding the timing and information requirements for replacement transactions) 6
7 Current IA Construct PJM Concerns (cont.) The uncleared MW portion of a PJM 3 rd IA sell offer made on behalf of load is allocated to load in the form of Excess Commitment Credit MWs ( ECCs ) ECCs allocated to LSEs based on each LSE s June 1 PLC share of zonal PLC LSEs may use the ECCs to replace commitment of an LSE owned resource or may bilaterally transact to another party to be used as replacement capacity While PJM s release of capacity in IAs provides lower overall cost to all PJM load, allocated ECCs provide benefit only to those LSEs that use the ECCs to replace the commitment of a directly owned resource or able to find a buyer for the ECC May discourage supply-owning LSEs from directly participating in IAs to purchase replacement capacity thereby eliminating off-setting cost effect to all other LSEs and eliminating value to other LSEs of the otherwise committed self-supply resource 7
8 PJM's IA Redesign Proposal To address these concerns, PJM proposal includes changes to the following aspects of the current IA rules: Number and purpose of Incremental Auctions Triggers, Quantity and Price for PJM Buy Bid Triggers, Quantity and Price for PJM Sell Offer Market Participant activity in IAs Excess Commitment Credits 8
9 Number and Purpose of Incremental Auctions Conduct a single IA, 3 months prior to each delivery year, in which participants may submit buys bids for replacement capacity Final capacity value of all existing resources is known at this time for purpose of fine-tuning an existing resource s BRA commitment level Planned resource owners should have more certainty of their ability to meet a BRA commitment at this time IAs coinciding with timing of existing 1 st and 2 nd IA are conditionally conducted only when the updated reliability requirement exceeds total committed capacity level by more than the lesser of 1000 MW or 5% the entire Updated VRR Curve Increment is employed in the auction No participant buy bids permitted in a conditional 1 st or 2 nd IA 9
10 Triggers, Quantity and Price for PJM Buy Bid PJM will buy in a 1 st, 2 nd or 3 rd IA only when the updated reliability requirement exceeds the total committed capacity level by more than the lesser of 1000 MW or 5% the 1 st and 2 nd IA are conducted only when this condition is met and only for purpose of PJM procurement The entire Updated VRR Curve Increment is employed in the clearing of any IA in which PJM is buying due to the above triggers 10
11 Triggers, Quantity and Price for PJM Sell Offer PJM will offer to release capacity only in a 3 rd IA and only if the updated reliability requirement is less than the prior utilized reliability requirement by more than 3% PJM will offer to release capacity in a MW quantity equal to the reliability requirement MW decrease above the 3% deadband PJM sell offer MW quantity set equal to the MW decrease in reliability requirement minus a MW quantity equal to 3% of the prior utilized reliability requirement PJM will offer to release at price using one of two potential methods Two alternative methods described on next slides 11
12 PJM Sell Offer Price (Alternative #1) Like today, the PJM sell offer price would be based on the Updated VRR Curve Decrement However, to be consistent with the 3% forecast deadband used to determine the PJM sell offer MW quantity, the Updated VRR Curve Decrement is based on an Updated VRR Curve that is determined using an updated reliability requirement that is adjusted upward by a MW quantity equal to 3% of the prior utilized reliability requirement The PJM sell offer price would be represented by a straight line connecting two points with the first point located at 0 MW and at a price set to the lowest price point of the Updated VRR Curve Decrement and the second point located at a MW amount corresponding to the PJM Sell Offer quantity and at a price set to the highest price point of the Updated VRR Curve Decrement but no greater than the BRA price 12
13 PJM Excess Commitment Sell-Back (Alternative #2) Conduct an auction for the PJM sell-back MW quantity that is completely separate from the buying and selling that occurs amongst participants in the 3 rd IA Conduct the 3 rd IA according to schedule with participation only by buyers and capacity market sellers Shortly after the 3 rd IA is conducted, conduct a separate auction of the PJM sellback MW quantity No participation by Capacity Market Sellers in this separate auction ; only buyers PJM will would clear participant buy bids based on the outcome that provides the largest rebate back to load No PJM sell offer curve is used or needed 13
14 Market Participant Activity in IAs Market Participants may submit buy bids only in the 3 rd IA (and PJM Sell-Back Auction under Alternative #2) IA participation by market sellers is completely voluntary unless PJM is procuring additional capacity in an IA Existing Generation Capacity Resources are subject to the must-offer requirement and mitigation only when PJM is procuring additional capacity in the IA Only exception is that a MOPR-applicable resource must offer at the applicable MOPR price unless it receives a MOPR exemption for the IA regardless of PJM status in auction) 14
15 Excess Commitment Credits Eliminate the allocation of uncleared PJM Sell Offer MWs as ECC MWs to LSEs in order to encourage fuller participation by buyers of PJM Sell Offer MWs and maximize the proceeds back to all PJM load when PJM releases capacity in a 3 rd IA 15
16 Appendix
17 PJM Sell-Back Quantity Determination Example 17
18 Alternative #1 - PJM Sell-Back Price Example 18
19 Alternative #2 - PJM Sell-Back Auction 19
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