Reliability Based Capacity Release Sell Back Curve
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- Joleen Reed
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1 Reliability Based Capacity Release Sell Back Curve When PJM held the Transitional Auction for the 2017/2018 Delivery Year, it procured 10,017 MWs of capacity not previously committed. PJM intends to release an equivalent amount of capacity in the 3 rd Incremental Auction. Given the risk that such a large volume of capacity could clear the auction at, or near, zero, and provide no economic benefit to load, PJM proposes to sell the capacity back using a supply curve that starts at $10.74/MW-day (the cost to procure this capacity in the Transitional IA divided by total load) and terminates at $144/MW-day (1.2 times the BRA clearing price). This curve, however, has no relation to the reliability benefits provided by this additional capacity. PSEG proposes a curve that accounts for the marginal reliability benefits provided by the incremental capacity along with the capacity already procured by PJM. Chart 1 $ $ $ $ $ $ VRR Curve Currently Procured + STRPT 24% IRM (1 in 100 LOLE) Sell Back Curve $ The Chart above plots the RTO VRR curve for the 3 rd Incremental Auction. Essentially, this is the same curve for the 2 nd Incremental Auction with the remaining Short Term Resource Procurement Target (STRPT) removed. This curve will be in effect for the 3 rd Increment Auction barring additional changes to the reliability requirement.
2 Table 1 The green line shows the amount of capacity assumed to be procured by PJM at the conclusion of the 3 rd Procured in BRA Incremental Auction assuming all anticipated PJM buy Released in 1st IA bids and sell offers are cleared. Table 1 shows how this Released in 2nd IA Remaining STRPT volume was calculated. It should be noted that this is Uncleared Sell Offers isn t an actual projection of the volume held by PJM or Total Held by PJM the clearing price, but rather the intersection on the VRR curve if all assumed PJM buy bids and sell offers are cleared. 166,750 MWs (3,579) MWs (2,763) MWS 2,475 MWS (504) MWS 162,378 MWS The red line on Chart 1 represents a 24% Installed Reserve Margin, which equates to 166,485 MWs of unforced capacity. The 24% IRM was chosen because it represents a Loss of Load Expectation (LOLE) of about 1 in 100 years (see Chart 3 below). Given the exponential relationship between an increasing IRM and the Reliability Index, there is essentially very little incremental reliability benefit to holding additional capacity above an IRM of 24%. Chart 2 1 Chart 3 RI (Years/Day) Curve from Chart 2 Regression Analysis % IRM PJM Reserve Requirement Study
3 Proposed Curve At its starting point, we assume that PJM will hold 162,378 MWs of capacity after the 3 rd Incremental Auction, assuming all PJM buy bids and sell offers are filled. As such, this represents the starting point for the 10,017 MWs of additional capacity held by PJM, which in the inverse, represents the end point for PJM s sell offer for the excess capacity. While we recognize that reliability follows a curve, for the sake of simplicity, PSEG draws a straight downward sloping line between the point at which PJM s assumed procurement through the 3 rd IA intersects the VRR curve and a 24% IRM at a price of $30.68/MW-day. Since there is essentially no incremental reliability benefit to holding additional capacity beyond this point, this capacity is offered at the cost of procurement ($30.68/MW-day). This proposal calculates the cost of procurement slightly differently from PJM s of $10.74, using both the converted and new commitments, which yields a higher price floor: Table 2 MW TA price Cost to load Converted commitment 102,178 X $ X 365 days = $ 1,174,791,555 New commitment 10,017 X $ X 365 days = $ 553,915,058 Forecasted peak load 154,377 (From 17/18 2nd IA Planning Parameters) Alternative price floor $ Chart 4 below shows the reliability based sell offer curve versus the PJM proposed curve. Chart 4 $ $/MW-day $ $ $ $80.00 $60.00 $40.00 $20.00 $- PJM Proposal Reliability Based Reliability Based Point A - $ Point B 5,910.0 $ Point C 10,017.0 $ PJM Proposal Point A - $ Point B 10,017.0 $ ,000 4,000 6,000 8,000 10,000 12,000 MWs Offered
4 Benefits to Load PJM procured a total of 112,194 MWs of Capacity Performance in the 17/18 Transitional Auction at a price of $151.50/MW-day. This was a premium of $31.50 over the Base Residual Auction clearing price of $120/MW-day. If we assume that $31.50/MW-day represents the risk premium implied by the market of assuming a CP obligation, then generators with both Base and CP obligations may be willing to buyout of a portion of their base obligations at this level in order to manage CP risk across their portfolios. By freeing up units with Base obligations, generators could move CP obligations across units in the event certain generators are experiencing difficulties, thus mitigating their risk. Even entities without portfolios or only Base obligations may be willing to buy out at this level if a market develops for accepting CP obligations from units looking to shed those commitments. While some may object to risk mitigation strategies such as this as not being consistent with the spirt of a physical CP commitment, the alternative is for PJM is to price this capacity above a reasonable risk premium level and hold onto it. In effect, this would result in a reserve margin well above 24%, which would reduce the risk of a CP event to near zero. Effectively, PJM would be providing this CP risk mitigation benefit to CP market participants for free. If we assume a $31.50 clearing price based on market participants employing CP risk mitigation strategies, under the PJM proposal, PJM would sell 1,560 MWs for a total of $18 million credited back to load. Under the PSEG proposal, PJM would sell 5,950 MWs for $68.4 million credited back to load. An assumed clearing price of $31.50/MW-day is in-line with the 2 nd Incremental Auction clearing price for the RTO/MAAC of $ Finally, 5,950 MWs only represents a little more than 5% of the CP commitments in the market. Implementation We note that the proposed sell back curve includes points which rely on factors that could change between now and the conclusion of the 3 rd Incremental Auction. For example, the reliability requirement could change which would result in an adjustment to the RTO VRR curve and the amount of capacity either purchased or released by PJM. However, for the sake of simplicity, we recommend basing the sell back curve on the planning parameters used for the 2 nd Incremental Auction for the 2017/2018 Delivery year as posted 7/25/2016 ( 2 nd IA Parameters ). To simplify even further, we would recommend adopting the three points described in Chart 4 above. However, PJM could adjust Point B by calculating the actual 1 in 100 LOLE, which we estimated at a 24% reserve margin.
5 Detailed Calculation of Sell Offer Points Taking the points in reverse order: Point C - This point is based on the theoretical intersection between the VRR curve for the 3 rd Incremental Auction and the total amount of capacity held by PJM at the conclusion of the 3 rd IA assuming the clearing of all assumed sell offers and buy bids. The VRR curve was drawn using the 2 nd IA Parameters after removing the Short-Term Resource Procurement Target (STRPT). This resulted in a VRR curve with the following points: Table 3 MWs $/MW-day Point A 152,480.6 $ Point B 157,854.3 $ Point C 163,228.1 $70.49 As shown in Table 1 above, we assume PJM will hold 162,378 MWs of capacity at the conclusion of the 3 rd IA. To be clear, this isn t a projection of actual capacity held, which will be a function of changes in the planning parameters along with buy bids and sell offers actually cleared, but rather an implied amount of capacity held assuming no changes to the reliability requirement and the clearing of all sell offers and buy bids by PJM. The amount of capacity procured in the BRA as well as released in the 1 st and 2 nd Incremental Auctions was taken from the nd Incremental Auction Results 2 from the summary tab. The remaining STRTP was taken from the 2 nd IA Parameters tab from the 2 nd IA Planning Parameters and represents the amount of capacity held for procurement in the 3 rd IA. Uncleared sell offers were calculated as the total PJM Buy Bid (which was negative) for the 2 nd Incremental auction, minus the total amount of capacity released by PJM in the 2 nd IA. The quantity of 162,378 MWs intersects the VRR curve at $115.07/MW-day. This intersection serves as the basis for Point C. 2
6 Point B Point 2 is the intersection of $30.68/MW-day and a 24% Reserve Margin. Again, this is based on the 2 nd Incremental Auction planning parameters calculated as follows: FPR = (1+24% IRM) * (1-5.93% EFORd) = Preliminary Forecast Peak Load = 154,377 Preliminary FRR Obligation = 15,202 EE Cleared in Prior Auctions (UCAP) = 1, ,377 * , ,611 = 166,485 MWs Point C Point C, the starting point, is zero MWs at $30.68.
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