Homer City Generation says it can work with controversial PJM changes

Coal-fired power producer Homer City Generation LP had generally supportive comments to make on Jan. 20 at the Federal Energy Regulatory Commission over Dec. 12 filings by PJM Interconnection of proposed changes to PJM’s Amended and Restated Operating Agreement, the Reliability Assurance Agreement Among Load Serving Entities (RAA) and the Open Access Transmission Tariff.

“The filings made in the above-referenced dockets are intended to work in concert to effectuate a significant modification in the manner in which PJM procures supply resources for reliability purposes under its ‘Reliability Pricing Model’ (‘RPM’) and subsequently commits those resources to serve load under certain emergency conditions through PJM-administered wholesale markets,” Homer City noted. “PJM has requested an effective date for these changes of April 1, 2015.”

Homer City, an affiliate of General Electric (NYSE: GE), owns the Homer City Generating Station, a 1,884-MW, coal-fired generating facility located near Indiana, Pennsylvania. Homer City participates in PJM’s capacity and energy markets.

The company added: “Homer City agrees with the statement made by PJM in the PJM Capacity Performance Filing that ‘it has become apparent that the current RPM market design is not providing sufficient deterrents to poor performance or sufficient incentives for good performance.’ Put more simply, ‘you get what you pay for.’ A long-standing economic principle in electric market design is that, in determining whether to invest in an energy facility, a party will consider whether it is likely to recover from capacity, energy and ancillary services revenues, its capital costs together with a reasonable return, over the facility’s useful life. PJM has recognized the importance of supporting that analysis in order to attract new investment.

“Through a protracted series of stakeholder proceedings and Commission actions, the relevant parties have hammered out a forward capacity construct for both existing and planned resources. This reliability pricing model (‘RPM’) addresses the need to provide supply resources with an additional source of predictable revenue above that earned for producing electricity (which is based on short-term marginal cost of production, only), in order to incentivize new capital investments to be made. This additional capacity revenue is intended to approximate an annualized ‘cost of new entry’ (‘CONE’) for a generation resource less the revenues which it can earn through spot electricity production (‘Net CONE’).

“Determination of Net CONE is a deliberate, consultative process which has been undertaken every third (now fourth) year in connection with PJM’s consideration of its reliability purchase requirements, intended to insure sufficient generation to serve load, as and when needed. Although the RPM market results rarely please all stakeholders all the time, to date, there has been a rough consensus the RPM markets are more efficient and cost-effective than the alternatives (a purely regulated, cost-of-service model or an ‘energy-only’ market) and better allocate risk of non-performance to generators from load. Despite PJM’s agreement that the RPM markets should tend to clear at Net CONE, in fact, the RPM Base Residual Auction (‘BRA’) market has failed to clear at that level in almost every prior BRA. This outcome results, in large part, from the reluctance of facilities with sunk capital costs to risk not clearing in the BRA and therefore giving up all capacity revenues even if they are suboptimal, and accounts for the fact that over 50% of supply offers in the 2017/2018 BRA were price takers (offering at a zero bid). Indeed, even before their capital costs are sunk, recent developers have been willing (based on competitive new entry costs, optimistic forecasts of energy and ancillary services revenues or sheer Micawber-like faith that something will turn up) to opt for a lower, ‘Unit Net CONE’ mitigated price rather than risk failing to clear the RPM market at Net CONE. This behavior benefits load by reducing prices, but it leaves all suppliers with perennially low revenues relative to Net CONE.”

Homer City later said: “Prompted by the Polar Vortex, which revealed that facilities had not prepared for unlikely, but destructive, winter events, PJM had to consider what actions it would take to address the situation, no longer satisfied by merely disqualifying capacity that could not be delivered through EFORd reductions and penalizing resources for EFORp shortfalls. PJM had some choices – it could have left the risk of these events on load and undertaken, itself, the burden of determining the value of lost load, then hedging this risk on behalf of load, by requiring the acquisition of additional capacity resources. Instead, PJM determined to shift the risk of virtually all outages to suppliers through its Capacity Performance proposal (‘Capacity Performance Rules’) described in the PJM Reliability Filings. Homer City is not convinced that this decision is most efficient, as it requires many individual facilities to conduct complex risk analyses for ‘black swan’ events and then individually price those risks, in a manner which is uncoordinated by design. However, Homer City is willing to assume the new risks and believes it can manage them successfully, as long as it is adequately compensated for doing so.”

EFOR stands for “Equivalent Forced Outage Rate.” EFORd is the probability a generator will fail completely or in part when needed. EFORp is the actual rate at which a generator failed completely or in part when needed during pre-defined peak hours.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.