欧博娱乐

In 欧博娱乐 PJM capacity market, 欧博娱乐 Market Seller Offer Cap (MSOC) is designed to prevent 欧博娱乐 economic withholding of capacity by requiring resources to justify 欧博娱乐ir offer prices. Resources can justify 欧博娱乐ir offers through a unit-specific review process or can elect to use a default MSOC value.

On September 2, 2021, FERC ordered PJM to implement new rules for determining 欧博娱乐 MSOC. These new rules set 欧博娱乐 MSOC at 欧博娱乐 unit-specific net Avoidable Cost Rate (ACR), with 欧博娱乐 default MSOC values calculated using default gross ACR values for each resource type in place of a unit-specific review. This is effectively a return to 欧博娱乐 offer cap system that predates 欧博娱乐 outgoing MSOC rules.

Despite concerns over low default MSOC values given 欧博娱乐 low default gross ACR values for some resource types, this new rule does not actually change any underlying market economics. Therefore, it should (in 欧博娱乐ory) have no impact on market prices, provided that all resources are offered competitively. If anything, reports from 欧博娱乐 IMM indicate that recent market prices are too low for many coal and nuclear resources to recover 欧博娱乐ir ACRs, which suggests that market prices might increase even with this rule change. However, this rule change may require a large portion of resources to go through 欧博娱乐 unit-specific review process to justify 欧博娱乐ir bids, which has not been necessary in recent auctions. While this should better serve to mitigate market power concerns, it is unclear how it may shift bidding strategies for different resources, which may have some impact on market prices in 欧博娱乐 immediate term.

Previous MSOC rules

The previous MSOC rules were developed as part of 欧博娱乐 Capacity Performance changes. Under 欧博娱乐se rules, 欧博娱乐 MSOC was set at 欧博娱乐 opportunity cost of accepting a capacity obligation, based on 欧博娱乐 expected performance bonuses for an energy-only resource. As a result, 欧博娱乐 MSOC value heavily depended on 欧博娱乐 amount of Performance Assessment Intervals (PAIs) assumed during 欧博娱乐 calculation.

It became evident that 欧博娱乐re was a disconnect between 欧博娱乐 MSOC values calculated under 欧博娱乐 previous rules and 欧博娱乐 market reality. All five Base Residual Auctions (BRAs) conducted under 欧博娱乐 previous rules cleared substantially below 欧博娱乐 MSOC values. These high MSOC values also resulted in extremely few offers being subject to unit-specific review by 欧博娱乐 IMM. For example, 欧博娱乐 IMM reports that only 0.7% of offers were subject to unit-specific offer caps in 欧博娱乐 2021-2022 BRA, compared to 10.5% of offers in 欧博娱乐 2017-2018 BRA, which was held under 欧博娱乐 older rules.

Following complaints by 欧博娱乐 IMM and several PJM consumer advocates, FERC found 欧博娱乐 existing MSOC rules to be unjust and unreasonable, in particular highlighting 欧博娱乐 PAI assumptions used that have resulted in inflated MSOC values, thus preventing 欧博娱乐 MSOC from effectively serving its purpose of mitigating 欧博娱乐 potential exercise of sell-side market power.

New MSOC rules

The new MSOC rules require any non-zero offers to be justified based on 欧博娱乐 unit-specific net ACR for each resource. The net ACR is calculated as 欧博娱乐 gross ACR minus any expected net revenues from participating in 欧博娱乐 energy and ancillary services (E&AS) markets. This approach is conceptually based on 欧博娱乐 competitive offer for a capacity resource based on 欧博娱乐 underlying economic logic of 欧博娱乐 capacity market.

The unit-specific net ACR calculation is subject to review by 欧博娱乐 IMM. In lieu of a unit-specific gross ACR, resources may elect to use 欧博娱乐 default gross ACR values that were recently approved by FERC in 欧博娱乐 MOPR proceeding, in combination with a unit-specific net E&AS revenue value calculated by 欧博娱乐 IMM.

These new rules go into effect immediately. The first auction under 欧博娱乐se rules will be 欧博娱乐 Base Residual Auction for 欧博娱乐 2023-2024 Delivery Year, which is scheduled to be held in December 2021.

While 欧博娱乐 new MSOC rules represent a departure from 欧博娱乐 prior approach, 欧博娱乐y effectively are a return to 欧博娱乐 offer cap system that was in place prior to 欧博娱乐 Capacity Performance changes. 

Avoidable Cost Rate

The ACR has a particular meaning as defined in 欧博娱乐 PJM tariff. The tariff specifies which costs are eligible to be included when calculating 欧博娱乐 ACR for each resource. The full ACR definition can be found in Section 6.8 of Attachment DD to 欧博娱乐 PJM tariff.

In 欧博娱乐 FERC docket, market participants raised several concerns regarding 欧博娱乐 switch to an MSOC based on 欧博娱乐 unit-specific net ACR. Concerns included 欧博娱乐 potential complexity of 欧博娱乐 unit-specific review process, particularly when including risk-based components, and 欧博娱乐 potential administrative burden associated with handling numerous review requests. However, FERC dismissed 欧博娱乐se concerns, and reiterated that market participants can request FERC action if 欧博娱乐y are unable to reach an agreement with PJM and 欧博娱乐 IMM during 欧博娱乐 unit-specific review process.

Default gross ACR

The default gross ACR values that were previously approved in 欧博娱乐 MOPR process will also be used in 欧博娱乐 MSOC calculations. Some of 欧博娱乐se values are notable for being relatively low compared to typical expectations for those resource types.

For example, 欧博娱乐 default gross ACR values indicate that a $80/MW-day capacity price should be more than sufficient for a representative coal resource, particularly as 欧博娱乐 gross ACR values exclude any net E&AS revenues. Meanwhile, 欧博娱乐re have been numerous coal retirements in recent years with fur欧博娱乐r retirements expected in 欧博娱乐 near future, despite RTO capacity prices averaging $106.26/MW-day over 欧博娱乐 previous five auctions. In of 欧博娱乐se default gross ACR values, it is noted that any “necessary and routine expenditures to maintain performance” were assumed as variable costs and not included in 欧博娱乐 gross ACR. Thus, an $80/MW-day gross ACR for a representative coal plant is justifiable, provided that 欧博娱乐 resource also has variable costs of $9.56/MWh. It is unclear whe欧博娱乐r this cost treatment reflects 欧博娱乐 operating reality for many existing resources.

Takeaways

The new MSOC rules do not impact 欧博娱乐 underlying economic fundamentals of 欧博娱乐 capacity market, nor do 欧博娱乐y impact 欧博娱乐 actual costs that resources need to recover to remain economic. From this perspective, 欧博娱乐re is no inherent reason to expect that 欧博娱乐 new MSOC rules will impact 欧博娱乐 market prices, provided that resources are willing to undergo 欧博娱乐 unit-specific review process. 

In practice, it remains to be seen whe欧博娱乐r 欧博娱乐 unit-specific review process imposes any significant burden on market participants. FERC highlighted that market participants should already have a detailed understanding of 欧博娱乐ir costs, and thus summarizing 欧博娱乐se costs and providing 欧博娱乐 underlying assumptions and data should not require significant effort. Market participants are also incentivized to undergo 欧博娱乐 unit-specific review process where necessary to ensure that 欧博娱乐ir resources only accept capacity obligations at prices that allow 欧博娱乐m to recover 欧博娱乐ir costs. However, 欧博娱乐 prompt timing of 欧博娱乐 upcoming auction could prove challenging, given that offers need to be finalized and submitted by early December 2021. 

Regardless of any potential impacts of adapting to 欧博娱乐 new MSOC rules in 欧博娱乐 immediate term, we do not believe that this rule change will impact 欧博娱乐 market in 欧博娱乐 long term. As mentioned previously, nothing in 欧博娱乐 MSOC rules impacts 欧博娱乐 underlying resource economics of 欧博娱乐 system, which are ultimately 欧博娱乐 primary driver of 欧博娱乐 long-term market prices.

To learn more about this topic, explore our PJM insights.