FERC Order 831: Offer Caps in Organized Wholesale Energy Markets – PJM

FERC has concluded that RTO and ISO offer caps on incremental energy offers are not just, nor reasonable due to several reasons:

1. They may prevent a resource from recovering its short-run marginal costs by not permitting that resource to include all its short-run marginal costs within its incremental energy offer.
2. Possible suppression of LMPs below the marginal cost of production during periods when fuel costs increase dramatically.
3. Inefficient dispatch of resources by the RTO/ISO because it is not able to distinguish among the resources’ actual costs.
4. The offer cap may discourage resources with short-run marginal costs above $1,000/MWh from offering supply to the RTO/ISO.

Per FERC Order 831, each RTO/ISO was directed to do the following:

• Cap each resource’s incremental energy offer at the higher of $1,000/megawatt-hour (MWh) or that resource’s verified cost-based incremental energy offer; and
• Cap verified cost-based incremental energy offers at $2,000/MWh when calculating locational marginal prices (LMP) (hard cap);
• In addition, a fair verification process needs to be instated to ensure that a resource’s cost based incremental energy offer above $1,000/MWh reasonably reflects that resource’s actual or expected costs.

This was a response to the 2014 polar vortex, which caused natural gas price spikes that resulted in some generators in the Northeast to not recover their costs.

PJM’s Response

In short, incremental energy offers will be capped at the higher of $1,000/MWh or a resource’s cost-based energy offer, with $2,000/MWh being the maximum offer eligible for setting LMPs; approved offers over $2,000 are eligible for uplift payments.

Further, in order to ensure that valid offers are selected, PJM is proposing two sets of reforms for verifying offers above $1,000/MWh:

1. An automated screen to run the final check to verify cost-based offers and;
2. Enhancement of PJM’s cost development guidelines and Fuel Cost Policy review process.

PJM will calculate Maximum Allowable Incremental Cost using the Maximum Allowable Operating Rate and Bid Production Cost.  The Maximum Allowable Operating Rate is a PJM-determined value based on (a) resource-specific data provided by the Market Seller as part of the Fuel Cost Policy process and (b) commodity pricing data for trading hubs and indices that PJM will obtain from a third-party vendor.

 See “Figure 1: Heat Input Curve” chart (Page 9) – Source: PJM

In contrast, Bid Production Cost is determined based solely on data from the Market Seller’s cost-based offer under review.

 See “Figure 2: Bid Production”  chart (Page 11) – Source: PJM

In the final step, PJM evaluates the reasonableness of the submitted offer segment by comparing it against the Maximum Allowable Incremental Cost yielded by the formula. If the price submitted for the offer segment is less than or equal to the Maximum Allowable Incremental Cost value, then that segment on the Market Seller’s cost-based offer is deemed verified and is eligible to set LMP.

PCI’s GenManager platform enables front office users to plan and create strategies to model bidding capabilities of different types of resources.  Users can configure constraints and alarms to create alerts around potential market limitations to ensure that optimized offers are submitted to the market that adhere to ISO guidelines. Visit our website or click on the “Contact PCI” button on any blog page to learn more.