PJM will reduce the volume of imports that clear in next year’s Base Residual Auction – potentially increasing capacity prices – under methodology approved by the Planning Committee yesterday.

The committee approved revised methodology that will create five import zones and limit external resources in next year’s BRA to 6,200 MW ­– a 17% drop from the 7,483 MW that cleared in May for delivery year 2016/17.

That’s good news for generators in PJM, who have been bemoaning the fall in capacity prices resulting from competition from both imports and demand response. But there’s no guarantee that it will increase clearing prices.

While cleared imports more than doubled in this year’s BRA, demand response offers dropped 27% from the 2012 auction. A rebound in DR offers next year could reduce upward pressure on prices.

Another unknown yesterday was how the impact of an exemption for external generators with firm transmission that commit to providing capacity in future auctions and have pseudo-ties allowing PJM to control their dispatch.

PJM planning staffers who presented the methodology yesterday could not say how much of the imports that cleared in May would be exempt from the limits. No one from PJM’s markets staff attended the meeting or was made available for questions from stakeholders.

About 64% of the imports that cleared in May (4,788 MW) had confirmed firm transmission service from the resource into PJM. The remainder was under study.

Five Zones

The new methodology sets both an overall limit and individual limits for five “external source zones.” Generators in the five zones will compete against each other until the individual caps or the overall limit is hit. The zones and limits are:

• North (New York ISO & ISO New England): 1,598 MW.
• West 1 (MISO East, MISO West & Ohio Valley Electric Corp.): 2,301 MW.
• West 2 (MISO Central + MISO South): 767 MW.
• South 1 (Tennessee Valley Authority & LG&E Energy Transmission Services): 1,278 MW.
• South 2 (VACAR — non-PJM): 2,493.

Based on current assumptions for 2018, PJM’s First Contingency Incremental Transfer Capability (FCITC) is 9,700 MW. Because 3,500 MW of the import capability must be reserved for the Capacity Benefit Margin, the cap on imports clearing in the BRA would be 6,200.

The limits will be adjusted yearly based on changes in load and generation, in the same way that Capacity Emergency Transfer Limits (CETL) — which govern transmission into Locational Deliverability Areas (LDAs) — are modified.

“We’re approving the methodology, not the [cap] numbers,” explained Steve Herling, PJM vice president of planning.

One utility representative said PJM was moving too quickly to adopt the new rules, noting that the RTO had not done a “backcast” to determine how the new rules would have affected the May auction. “It seems like it would be pretty unfair to make us vote until we understand the impact on prices,” she said.

But PJM staff insisted stakeholders push the initiative forward to allow the new rules to take effect with next year’s auction.

That was enough for most stakeholders. “The methodology is sound. Let’s vote,” said one generation owner representative. The committee approved the methodology acclimation, with only four stakeholders voting no.

Market Impact

Questions about the market impact of the changes will be taken up by the Markets and Reliability Committee, which will be asked to approve the measure in a special meeting next Thursday.

The fact that the cap is below 7,400 MW raises the question of whether “the imports that cleared in May are unreliable,” Herling acknowledged. But he said, “We have not made any such conclusion.”

Another representative questioned the planners’ method for reducing each of the five regional caps by a share of PJM’s 3,500 MW Capacity Benefit Margin (CBM). CBM, reserved to import capacity from neighboring areas in emergencies, allows PJM to reduce its installed generating capacity below that which may have otherwise been required.

Herling said that planners used a “vanilla, pro rata” apportionment of CBM among the regions. They could not optimize CBM among the regions, he said, because “we never know where the help is going to come from if we have a CBM emergency.”

Imports Doubled

The new methodology is the result of a problem statement requested by PJM officials, who said they feared imports in this year’s auction “may have approached, or even exceeded, the amount that can be reliably supported during actual emergency conditions.” (See PJM Considers Limit on Capacity Imports.)

Cleared imports grew from about 3,000 MW to more than 4,500 MW in 2009-2012 before more than doubling this year. (See Capacity Auction: New Generation, Imports Up, Prices, DR down.)

PJM officials were particularly concerned because the majority of the imports were from MISO and other points west, with very little from the north or south. West of PJM imports nearly doubled to 7,081 MW over last year’s auction, 4,723 MW of it from MISO and areas that will be integrated into MISO by the 2016/2017 Delivery Year.

Refining the Methodology

On Sept. 27, PJM staff brief the Planning Committee on a methodology that they said suggested PJM could import 11,000 to 12,000 MW. (See Current Capacity Imports OK: Study.)

At the Oct. 18 meeting, however, PJM’s Mark Sims told members that the limit will be “slightly lower” than 11,000 and closer to the 8,347 MWs imported on July 16, 2013, the highest import observed in an analysis of three years of historical data. (See Import Cap Likely to Settle About 9,000 MW.)

The Sept. 27 results used a 1% distribution factor (DFAX) — which PJM decided was overly conservative — and assumed unlimited redispatch to maximize imports, which officials said was overly optimistic.

The Oct. 18 results assumed more limited redispatch but raised the outage transfer distribution factor (OTDF) to 3%, meaning the model only addressed transmission facilities that carried 3% or more of a projected generator’s output. The two changes “have a tendency to act in opposite directions,” Herling said.

FERC Scrutiny

PJM wants to include the new limit in February when it posts the planning parameters for the 2014 base auction.

To meet that schedule, officials called a special MRC meeting Thursday to vote on the changes. The committee also will be considering other changes that could limit the volume of DR that clears in the auction. (See States, LSEs on Collision Course with PJM over DR Changes.)

Both initiatives will require the approval of the Federal Energy Regulatory Commission. Also watching closely will be MISO officials, who have complained to FERC that PJM’s modeling of cross border transmission deliverability is unfairly limiting its generation from competing in PJM. (See FERC Likely to Increase Pressure on PJM-MISO Joint Market Talks.)