The deadline for stakeholder consensus on recommendations is August 31, 2014, with a FERC filing deadline of October 1, 2014.

Transcription

1 2750 Mnre Blvd. Audubn, PA PJM Variable Resurce Requirement Parameter Review At PJM s directin and having successfully earned the bid t perfrm the wrk, The Brattle Grup cnducted a review f Variable Resurce Requirement curve parameters. The review was cmpleted in cmpliance with the Sectin 5.10a f the PJM Tariff, which requires a quadrennial review f the three key parameters in the Variable Resurce Requirement curve: the shape f the VRR curve, the Cst f New Entry, and the Energy and Ancillary Services ffset methdlgy. Brattle s preliminary findings were shared with PJM stakehlders in an April 29 special meeting f the MRC and Brattle s final reprts and recmmendatins t PJM are psted n pjm.cm PJM has reviewed Brattle s analysis and recmmendatins and subsequently, has develped preliminary PJM staff recmmendatins. These recmmendatins will be the basis fr discussin by stakehlders in the Capacity Senir Task Frce in which PJM will seek t achieve cnsensus n mdificatins t the shape f the VRR Curve, CONE and E&AS. PJM s preliminary recmmendatins are psted n pjm.cm. The deadline fr stakehlder cnsensus n recmmendatins is August 31, 2014, with a FERC filing deadline f Octber 1,

2 2750 Mnre Blvd. Audubn, PA Andrew L. Ott Executive Vice President, Markets May 15, 2014 PJM Membership/ Stakehlders: Re: VRR Curve Key Parameter Review, PJM Preliminary Recmmendatins Dear PJM Members: In accrdance with its Tariff, PJM has reviewed the shape and key parameters f its Variable Resurce Requirement Curve that is used t clear the Reliability Pricing Mdel auctins. Sectin 5.10 a) (iii) and Sectin 5.10 a) (vi) (C)-(D) f Attachment DD f the PJM Open Access Transmissin Tariff states that beginning with the delivery year that cmmences June 1, 2018, and cntinuing n later than fr every furth delivery year thereafter, PJM will perfrm a review f: (1) the shape f the VRR Curve, (2) the Cst f New Entry fr CONE areas used in the VRR Curve and (3) the methdlgy fr determining the Net Energy and Ancillary Services Revenue Offset r E&AS fr the regin PJM serves and fr each zne. Based n the results f such review, PJM shall prepare a recmmendatin t either mdify r retain the existing VRR Curve shape, CONE and E&AS Offset methdlgy. The RPM Base Residual Auctin fr the 2018/2019 delivery year will be held in May As PJM previusly advised members, PJM retained an independent cnsultant, The Brattle Grup, t review the VRR Curve, CONE values and E&AS methdlgy. Brattle has prepared tw detailed and cmprehensive reprts setting frth its analysis and recmmendatins fr changes in these areas. These reprts, entitled Brattle 2014 CONE Study and Brattle 2014 VRR Curve Reprt were psted t the PJM website n May 15, Based n its wn review f the wrk dne by Brattle, PJM staff has develped preliminary recmmendatins with regard t the VRR Curve, CONE and the E&AS Offset methdlgy as utlined in Sectin 5.10 f Attachment DD f the Tariff. These recmmendatins initiate a Tariff-prescribed prcess f stakehlder and PJM Bard review, the timing f which is prpsed in FERC filing ER Under amended timing specified in this filing, PJM s prpsed mdificatins t the Tariff are t be prvided t the stakehlders by May 15, Tariff changes resulting frm that prcess fr use in the May 2015 BRA must have final stakehlder input by Aug. 31, 2014, with a PJM Bard review t cnclude with changes submitted t the Federal Energy Regulatry Cmmissin by Oct. 1, 2014, as prpsed in ER The changes resulting frm the stakehlder prcess culd include a cmpletely different set f recmmended changes, a mdified versin f PJM staff preliminary recmmendatins r the PJM staff preliminary recmmendatins as utlined belw.

3 Variable Resurce Requirement Curve Shape Cnsistent with the Tariff, Brattle cnducted detailed prbabilistic simulatin mdeling f varius VRR Curve shapes and parameterizatins t determine which curve wuld best facilitate investment in new capacity, efficiently retain existing resurces and satisfy applicable reliability requirements. Thrugh its analyses, Brattle fund that the existing VRR Curve shape wuld nt satisfy defined perfrmance bjectives and fails t achieve resurce adequacy bjectives at bth the system level and the lcal level n a lng-term average basis. Brattle has cncluded that changing the VRR Curve shape and parameters wuld enhance RPM perfrmance and better meet defined reliability and ecnmic bjectives such as mitigatin f price vlatility, achievement f an average Lss-f-Lad Expectatin f ne event in 10 years fr the system, and a 1-in-25 cnditinal LOLE in each mdeled Lcatinal Deliverability Area particularly in the face f changes in market cnditins and underestimates f Net CONE relative t the current VRR Curve. 1. Brattle Recmmendatins: Brattle recmmends and prvides supprt fr the fllwing changes t the VRR Curve t imprve perfrmance and better meet reliability and ecnmic bjectives: System Curve Right shift the price cap (pint a ) Shifting pint a t a quantity at 1-in-5 LOLE (apprximately Installed Reserve Margin-1 percent) wuld significantly imprve reliability utcmes by prviding strnger price signals when capacity resurce supplies are reduced r becme mre expensive and wuld nt increase lng-term average prices. Stretch the VRR Curve int a cnvex shape This cnvex shaped curve is steeper at lwer reserve margins and flatter at higher reserve margins. Under Brattle base mdeling assumptins, the recmmended cnvex curve will meet the 1-in-10 reliability standard n average. Lcal VRR Curve Adpt the system-level recmmendatins at LDA level, with additinal recmmendatins t: Increase the LDA price cap t 1.7x Net CONE Brattle fund that a higher cap substantially imprves simulated utcmes in LDAs because strnger price signals when supplies becme scarce. Impse a minimum curve width equal t 25 percent f Capacity Emergency Transfer Limit 2. PJM Preliminary Recmmendatins: PJM has reviewed the Brattle analysis and prbabilistic simulatins and recmmends several changes t the current VRR Curve shape. PJM agrees that the cnvex curve shape prpsed by Brattle will allw fr a mre rbust, reliable capacity market by quickly incentivizing capacity as the system ges shrt and prviding price stability as the system ges lng. PJM believes the Brattle simulatin results demnstrate that a cnvex curve will prvide better lng-term reliability at the least cst. PJM preliminary recmmendatins are t: Adpt the cnvex curve recmmended by Brattle but right-shifted by 1 percent

4 This wuld mean new parameter values f: Pint a: Price cap maximum f (150 percent Net CONE, r 100 percent f Grss CONE) at UCAP level f (IRM percent) Pint b: Price f 75 percent Net CONE at UCAP level f (IRM percent) Pint c: Zer price at UCAP level f (IRM percent) Thrugh prbabilistic simulatin mdeling, Brattle fund that the current shape des nt meet the 1-in-10 bjective n average and shws prcurement belw the reliability requirement 35 percent f the time. The Brattle-recmmended cnvex curve meets the 1-in-10 bjective but still shws prcurement belw the reliability requirement 29 percent f the time. PJM s recmmended cnvex curve shws prcurement belw the reliability requirement nly 16 percent f the time. It meets the 1-in-10 bjective and it allws RPM t better handle year-t-year vlatility in system cnditins. While this curve des nt meet the reliability target 100 percent f the time in simulatins, PJM believes this curve strikes an apprpriate balance between reliability bjectives and minimizing verall cst t cnsumers. Use the same curve fr LDAs as is used fr the System PJM recmmends using the same curves fr LDAs as are used fr the system. VRR Curve Shapes: Current Curve, Brattle Recmmendatin (Cnvex Tuned, 1.5x Cap) and PJM Preliminary Recmmendatin (Cnvex 1.5x, Right-Shifted 1%)

5 Cst f New Entry Similar t prir studies used t develp Grss CONE values fr RPM, Brattle cnducted a detailed bttm-up analysis f the fixed csts t install and perate a new cmbustin turbine plant and a new cmbined cycle plant in each CONE Area in the regin PJM serves. Brattle selected engineering services firm Sargent & Lundy t determine capital and O&M csts fr Grss CONE fr the specified technlgies. Brattle develped estimates fr the remaining categries f input csts such as gas and electric intercnnectin csts, prperty taxes, and ther assciated csts as well as reviewed the methdlgies and calculatin f Grss CONE apart frm engineering cst estimates. 1. Brattle Recmmendatins: Update Grss CONE estimates using Sargent & Lundy s estimates Brattle cncluded that PJM shuld update Grss CONE values with the values specified in their study. Using these study estimates, the new Grss CONE values fr the Tariff mandated CT reference resurce wuld be (based n level nminal): Eastern MAAC: $150,000/MW-Yr r $411/ MW-Day (ICAP) Suthwest MAAC: $148,400/MW-Yr r $407/ MW-Day Rest f RTO: $138,000/MW-Yr r $378/ MW-Day Western MAAC: $143,500/MW-Yr r $393/ MW-Day Dminin: $141,200/MW-Yr r $387/ MW-Day Brattle updated the CC Grss CONE values t (based n level nminal): Eastern MAAC: $203,900/MW-Yr r $559/ MW-Day (ICAP) Suthwest MAAC: $197,200/MW-Yr r $540/ MW-Day Rest f RTO: $188,100/MW-Yr r $515/ MW-Day Western MAAC: $190,900/MW-Yr r $523/ MW-Day Dminin: $182,400/MW-Yr r $500/ MW-Day Cnsider replacing the Handy-Whitman Index Brattle recmmends switching frm the Handy Whitman Other Index t the Bureau f Labr Statistics indices fr wages, materials and turbine. It cncluded that Bureau f Labr Statistics indices can prvide a mre accurate escalatin factr fr CONE estimates year ver year. Adpt level-real CONE values As with previus RPM reviews, Brattle believes that level-real CONE wuld be mre representative f investrs expected recvery f capital and fixed csts ver the lng term. Cnsider adpting the average f CC and CT Net CONE values defining the VRR curve Brattle investigated the apprpriateness f a CT as the PJM Tariff-mandated reference resurce and lked t empirical as well as financial data in determining the recmmended reference resurce. Based n its findings, Brattle has recmmended using an average f CT and CC Net CONEs as the reference technlgy Net CONE value. Brattle cncludes that using this methdlgy wuld recgnize that CC plants are the predminant technlgy under develpment by merchant generatrs (which increases the accuracy f grss CONE estimates), while

6 aviding a cmplete switch away frm the currently defined CT reference technlgy. Revise CONE areas t align mre clsely t mdeled LDAs Brattle recmmends (a) using the CONE Area 3: Rest f PJM estimate fr the system-wide VRR curve (rather than the current fixed value adpted in settlement); (b) using the CONE Area 4: Western MAAC estimate fr the MAAC VRR curve (rather than taking the minimum f sub-lda numbers); and (c) cmbining CONE Area 5: Dminin int CONE Area 3: Rest f PJM, given that the Area 5 estimate has nt been used t date Cnsider intrducing a test fr a separate Grss CONE fr small LDAs This recmmendatin is nly needed if the small LDA is persistently imprtcnstrained, shws little evidence f ptential fr new entry and shws evidence f structurally higher entry csts 2. PJM Preliminary Recmmendatins: PJM supprts several Brattle recmmendatins and prvides justificatin fr thse it des nt, fcusing n the bjective f mst accurately capturing new entrant csts within PJM and in specific PJM LDAs Adpt updated CONE Values as stated by the Study s findings PJM finds these estimates t be reasnable and well-supprted by Brattle analysis and recmmends the adptin f these values as PJM CONE values fr the 2018/2019 delivery year. Updated Grss CONE estimates are within -8 percent t +6 percent f CONE used in 17/18 parameters Additinally, these estimates are cnsistent with changes in csts ver the last three years frm studies dne fr Energy Infrmatin Administratin fr its Annual Energy Outlk mdeling. Add dual-fuel capability t reference technlgy fr CONE Area 3 Dual fuel shuld be included in Grss CONE mdeling fr all areas except CONE Area 2 CC Grss CONE in which PJM adpts the Brattle recmmendatin f firm gas transprtatin. Fr CONE Area 3 the Grss CONE with dual fuel capability are fr the CT $147,500/MW-year r $404/MW-day and fr the CC $193,700/MW-year r $531/MW-day. Cntinue t use frame-mdel CT as the reference resurce technlgy in RPM PJM recmmends maintaining the GE Frame 7FA mdel cmbustin turbine as the reference resurce in the PJM Tariff (Attachment DD, Sec. 2.58). This CT shuld include selective catalytic reductin technlgy in all CONE areas and dual fuel capability in all CONE areas fr the CT. PJM believes that cntinuity in maintaining the same technlgy type prvides market stability and avids perceived pprtunistic switching t units with mre favrable ecnmics in any given year. Additinally, PJM ntes the cnsistency with the precedent in the New Yrk Independent System Operatr capacity market, which recently selected a CT as its reference technlgy, and the reductin in Net CONE estimatin errr due t CTs lwer net E&AS revenue ffset cmpared with that f a CC. Per Brattle s study, initial CT and CC Net CONE estimates are fairly clse and it appears they may result in similar values in the lng run. Therefre, the utilizatin f CT reference is preferred because it appears t be mre

7 accurate as it is less sensitive t energy revenue ffset mdeling parameters and assumptins. And while n new frame-mdel CTs have been built in PJM in recent years, there have been mre expensive ($/MW-day basis) aer-derivative CTs built, which indicates that frame-mdel CTs are still an ecnmically viable new entry technlgy Switch t Bureau f Labr Statistics indices fr yearly Grss CONE escalatin PJM supprts the use f the Bureau f Labr Statistics quarterly census f emplyments and wages, prducer price index cmmdity data fr stage f prcessing and machinery and equipment, weighted apprpriately, fr the escalatin f Grss CONE values. When cmpared t estimated cst changes frm Brattle and Energy Infrmatin Administratin, the Bureau s data tracks these changes much mre clsely and accurately than the Handy-Whitman Index has dne. Additinally, the bureau s data is publicly available. Cntinue the use f level-nminal Grss CONE Using level-nminal Grss CONE results in the same net present value as the level-real Grss CONE ver 20 years, but accelerates a develper s investment recvery in real-terms and reduces the risk t develpers f waiting fr investment recvery tward the end f the 20 year asset life, thereby reducing the real-ptin t wait fr mre infrmatin befre making the investment decisin. Adpt a new methd f aligning CONE areas with mdeled LDAs (see belw) PJM believes that the market can send mre accurate price signals by better aligning CONE areas and LDAs. Eliminate Dminin as a CONE Area PJM recmmends incrprating the Dminin Zne int the determinatin f CONE Area 3 Grss CONE value because the Dminin zne has nt histrically been used as a CONE area and its value tends t be clse t the value in CONE Area 3. Energy & Ancillary Services Methdlgy Brattle has fund that the current PJM E&AS methdlgy is nt always an accurate reflectin f actual energy and ancillary services net revenues. In the case f CC technlgies in particular, Brattle fund that current methdlgies verstate revenues, thus understating true Net CONE. Fr CT technlgies, the current histrical actual E&AS methdlgy is mre accurate, as cmputed E&AS revenues mre clsely match E&AS revenues earned by CTs. Furthermre, E&AS revenues are less significant in investment recvery fr CT resurces. Brattle has prpsed the fllwing changes t the current methdlgy t ensure a mre accurate Net CONE: 1. Brattle Recmmendatins: Develp a frward-lking E&AS calculatin methdlgy Brattle believes that an E&AS ffset based n three years f histrical prices (the current methdlgy) can be easily distrted by anmalus market cnditins that are nt representative f what market participants expect in the future RPM delivery year. Histrical prices are als fur t six years ut f date relative t delivery perid crrespnding t a three-year frward Base

8 Residual Auctin and, therefre may nt be a gd indicatr f future market cnditins. Align E&AS ffset and Net CONE calculatins mre clsely t mdeled LDAs Under current cnstruct, E&AS ffset that is applied t a specific LDA may nt be calculated based n prices in that LDA, but n prices in the parent LDA, a sub-lda r an adjacent LDA. Cnsider impsing the parent LDA Net CONE value as a minimum fr sub-lda Net CONE values This recmmendatin wuld safeguard against errrs and assciated underprcurement in small LDAs that are always mdeled and/r binding. Calibrate histrical E&AS estimates t reflect plant actuals Given the large discrepancies in simulated histrical E&AS and actual unit margins, especially fr CCs, Brattle recmmends that PJM cmpile a mre detailed set f plant-specific cst and revenue data fr representative units that can be used fr such a calibratin, and then adjust its histrical simulatin apprach t develp E&AS numbers that are as reflective as pssible f these actual plant data in each lcatin. 2. PJM Preliminary Recmmendatins: After reviewing the E&AS methdlgy recmmendatins abve, PJM agrees that certain measures can be put in place t ensure a mre accurate E&AS calculatin. PJM believes that using the fllwing recmmendatins, the system will mre accurately capture the actual ecnmics and expectatins f future E&AS used in decisin making regarding new entry int the PJM market: Align E&AS ffset calculatin mre clsely t mdeled LDAs PJM finds that the average f E&AS ffsets f all znes in an LDA is mre representative f actual E&AS ecnmics than using ne zne E&AS ffset as new capacity may be built anywhere in an LDA. Develp a frward-lking E&AS methdlgy Outliers and disruptins in nrmal trends, as culd be seen with the mst recent winter, shuld nt be included in E&AS calculatin. The impacts f such abnrmalities can be mitigated by switching frm a histrical actual t a frward-lking methdlgy. PJM will cntinue t investigate whether its existing methdlgy t lk frward fr the energy and envirnmentally limited pprtunity cst adder t cst-based energy ffers, as utlined in Manual 15, culd be a suitable template fr the frward-lking E&AS ffset methdlgy. Calibrate histrical three-year values cnsidering actual histry f similar units PJM believes that by calibrating the current E&AS mdel t actual CC and CT perfrmance, the system will mre accurately capture the actual ecnmics used in market participant decisin making. PJM prpses t investigate reasns fr differences between Net E&AS estimated fr the reference resurce (using peak-hur dispatch) and actual Net E&AS fr similar generatin resurces. PJM will seek t revise methdlgy used t estimate Net E&AS fr its reference resurce based n this investigatin. Impse a minimum Net CONE fr sub-ldas at the parent LDA value

9 Impsing this minimum will keep investment signals strng in cnstrained areas, where capacity is mst needed, and mitigate the lcatinal reliability cnsequences f understating LDA Net CONE. In accrdance with the Tariff, PJM lks frward t reviewing all f these preliminary recmmendatins with stakehlders and receiving their input and pssible alternative recmmendatins in the hpe f reaching a stakehlder cnsensus that can be filed with the Cmmissin. Shuld yu have any questins with regard t this matter, please cntact me. Sincerely, Andrew L. Ott Executive Vice President- Markets cc: Dr. Jseph Bwring, Mnitring Analytics, LLC