How the Delayed PJM Capacity Auction can Increase Transmission Costs

How the Delayed PJM Capacity Auction can Increase Transmission Costs

PJM Interconnection is a regional transmission organization (RTO) that coordinates the movement of wholesale electricity for 13 states–Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia–and the District of Columbia. Acting as a neutral, independent party, PJM operates a competitive wholesale electricity market and manages the high-voltage electricity grid to ensure reliability for more than 65 million customers.

PJM’s annual capacity market, called the Reliability Pricing Model (RPM), is held in advance of the delivery year and ensures long-term grid reliability by securing the appropriate amount of power supply resources needed to meet predicted energy demand in the future.

After a meeting between the Federal Energy Regulatory Commission (FERC) and PJM in December 2021, the capacity auction that was originally slated for January 25, 2022, was moved to May 1, 2022. The change stems from efforts to comply with a March 18 FERC order ruling that the existing default market seller offer cap was unjust and unreasonable.

In the meeting, the Operating Reserve Demand Curve (ORDC)/Penalty Factors docket was discussed with the intent to improve market design by reviewing such things as:

  • Implementing new Reserve Constraint Penalty Factors (RCPFs) – this is the maximum cost that can be imposed in order to meet reserve requirements
  • The shape of the ORDC
  • Tier 1 and Tier 2 Products
  • Net Energy & Ancillary Services (E&AS) Revenue Offset

FERC determined that PJM had not demonstrated that its existing penalty factors and ORDCs are wrong. FERC recently changed the reserve market design and is reverting to the previous market design for the May 1, 2022 auction; a backward-looking Net Energy & Ancillary Services Revenue Offset rather than forward-looking.

The result could lead to an increase or decrease in obligations and/or charges. The extent of these changes is currently unknown.

Transmission Cost Overview

As a regional transmission organization, the delayed PJM capacity auction can directly affect transmission costs. Transmission is the act of moving electrical energy from power plants to electrical substations. Electricity travels at nearly the speed of light, arriving at a destination at almost the same moment it is produced. When transmission lines are connected, they form what we know as “the grid”.  This infrastructure may or may not be owned and/operated by your local utility.

In PJM, the mechanism that transmission owners use to recover their annual transmission costs and revenue requirements from PJM customers is called Network Integration Transmission Service (NITS).

NITS charges can change as costs associated with operation and maintenance, tax, cost of capital or rate base, and transmission owner cost of services fluctuate. Any changes to NITS rates must be approved by FERC before they can be charged to the customer.

Transmission Cost Calculation

Each local distribution company within PJM has a network transmission service peak load contribution (PLC) requirement. Similar to capacity tag costs, NITS (and Transmission Enhancement Charges) are calculated based on a customer’s peak-load demand and are referred to as the Transmission Tag, or Transmission PLC. The transmission tag uses the following formula: (Peak Load Value x Transmission Rate $/MW-day x # of Days in term)/Forecast Term Volume

Reducing PJM Transmission Costs

There are ways that PJM commercial customers can take action to reduce and control transmission costs. Depending on your risk budget tolerance, it may make sense for you to “pass-through” these costs so that you can manage them through demand reduction measures and obtain a lower transmission PLC. Your Network Service Peak Load (NSPL) is calculated based on the highest demand hour(s) of the year and can be decided upon by the local distribution utility. Companies that can reduce energy usage during certain peak hours will see a reduction in their NSPL, which is used to calculate the total transmission cost.

At Premier Power Solutions, our energy analysts and consultants work with clients on ways to reduce these costs and structure energy supply contracts that maximize the transmission PLC reduction. For more information, or to discuss your PJM transmission costs, contact us today.