How PJM’s New Performance Rules Are Affecting Energy Supply Contracts

Steven Huber

The effects of PJM’s new performance standards, approved by the Federal Energy Regulatory Commission (FERC) on June 10, 2015, are now becoming apparent as the results of recent PJM capacity auctions have now been posted. Under these new performance rules, PJM has added a performance payment to the final adjusted Zonal Capacity Price, and the results of these recent auctions are indicating higher capacity costs for all consumers in the PJM region. The new performance rules affect all future capacity years starting with the 2016/2017 capacity year. (Capacity years run from June 1 to the following May 30.) Retail energy providers will view FERC’s action as a “change in law” event.

Capacity accounts for 20 – 30% of a customer’s overall supply charges on average. The results of the Incremental Transition Auction indicate that customers could see an average increase of 15% to their overall supply charges for capacity year 2016/2017.

These new rules affect current energy supply agreements with retail electric providers. Customers with energy supply contracts that fix capacity and span into the 2016/2017 and/or 2017/2018 capacity years have contracted rates that were calculated using the results from Base Residual Auctions (BRA) held prior to FERC’s approval of the new PJM performance standards. The cleared rates of these auctions do not include the additional capacity performance payment component approved under the new standards. For capacity year 2018/2019, any energy supply contracts signed prior to the BRA results posted on August 21st where the capacity rate portion is fixed used contracted rates calculated under the old performance rules. These contracts did not anticipate any additional cost components resulting from change in law rules that would be used in the final capacity rates for the 2018/2019 capacity year.

New Performance Rules will be phased in over the next three capacity years. For capacity years 2016/2017 and 2017/2018, the new capacity performance payments are to be determined through individual Incremental Transitional Auctions since the BRA for these years has already been held. The cleared rates of these auctions will then be used in the calculation of the final zonal rates.

On Monday, August 31st, the results of the Incremental Transition Auction for capacity year 2016/2017 were posted by PJM. It published that a performance payment of $38.17/MW-day cleared the auction across all PJM’s zones. When added to the results of the 2nd Incremental Auction, held a few weeks earlier, the result is average zonal increases of around 46% as compared to the BRA that was held under the old performance rules. Customers who have contracts that fixed capacity during this period will see a rate increase of around $0.004/kWh (based on a 50% load factor). The average zonal rates for 2016/2017 are around 16% lower than the average zonal rates for 2015/2016.

Capacity year 2017/2018 had its Incremental Transition Auction results posted on September 9th. The rate cleared by this auction was $27.69/MW-day. When added to the results of the BRA results that cleared back in May 2015, the result is a 23% increase across all zones. Customers who have contracts that fixed capacity during this period will see a rate increase of around $0.0023/kWh (based on a 50% load factor). The average zonal rates for 2017/2018 are 10% higher than the average zonal rates
for 2016/2017.

For capacity year 2018/2019, the capacity performance payments are to be included in the Preliminary Zonal Capacity Prices of the BRA, so no transitional auction is needed for determining the final rates for this planning year. The results of the BRA for capacity year 2018/2019 were posted on August 21st. The rates cleared by this auction included the new performance payment amount, with cleared rates showing an average increase of around 28% as compared to the five year average leading up to this year. Not all zones will see an increase. Some zones, like BGE, METED, PENLEC, & PPL, actually show a 4% to 9% decrease, but other zones, like ComEd, will experience a 97% increase. There are three additional incremental auctions that will be held over the next three years before the final rates for 2018/2019 are set, and the final rates typically increase between 1% to 5% vs the BRA results. Electric supply agreements signed prior to August 21st with fixed capacity in the contracted rate will see a rate change or additional pass through line item on retail energy provider charges on invoices.

It is important to understand that the increased capacity costs in future years are not avoidable by returning the local electric utilities’ generation/supply service because electric utilities in PJM are subject to collecting the same capacity costs as retail electric providers. These higher capacity costs will be included in rate cases that electric utilities are expected to file with their respective public utility commissions.

Please contact your Ecova Energy Procurement Manager if you have any additional questions.

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The information in this page is offered only for general informational and educational purposes. It is not offered as and does not constitute legal advice.

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