On June 21, 2018, PJM Member GreenHat Energy, LLC, defaulted on a $1.7 million weekly invoice for an FTR position payable to PJM. PJM does not absorb the cost of market defaults; rather, PJM Members cover the cost of market defaults through a “default allocation assessment” charged to all PJM Members. The value of the weekly invoice that was the basis of GreenHat’s original default translates to a default allocation assessment to PJM Members totaling approximately $1.2 million. However, this weekly invoice unfortunately represents just the tip of the iceberg with respect to the impact of the GreenHat default on PJM Members and the PJM market. Below is more information to help understand the far-reaching ramifications of this significant event.
GreenHat was a participant in PJM markets for Financial Transmission Rights or “FTRs.” GreenHat started acquiring so-called “long-term FTRs” in 2015 and held FTR positions in its portfolio through 2021 before its PJM Membership was terminated due to the default. The value of GreenHat’s portfolio has declined since the FTRs were acquired. Existing PJM Tariff rules call for PJM to liquidate the entire position at the next available auction in the event of a default. Approaching the liquidation this way for the GreenHat default could result in significant risk premiums and ultimately raise the default allocation costs for all PJM Members. With this concern, PJM filed a request with FERC on July 26 for a waiver of the tariff obligation and to allow for liquidation of the FTR positions for one-month forward in each of the FTR auctions conducted from July to October 2018 to allow time for consideration of alternate approaches to handle the GreenHat default.
PJM has quantified the actual net losses on the FTR portfolio for the months of June and July 2018 and the costs to liquidate the August 2018 positions utilizing the approach set forth in the waiver request to be $42.5 million. Because GreenHat held positions into the future, PJM is unable to determine the full value of the final default allocation because the price of the future market is unclear. As such, given the remaining GreenHat positions, the actual amount of the default could far exceed $42.5 million.
At the August 23rd PJM Markets and Reliability Committee and Members Committee, PJM Members undertook two actions.
First, upon the motion of Exelon and Old Dominion Electric Cooperative, PJM Members approved PJM requesting FERC approval to allow PJM to suspend liquidating GreenHat’s August 24 through November 30 positions in favor of allowing these positions to “go to settlement.” Those market participants speaking in favor of this approach indicated it would allow PJM Members, if interested, to hedge the costs associated with the GreenHat FTR positions. This approach is also a reaction to information that the August 2018 FTR auction resulted in liquidation prices that were as much as six times higher than the actual portfolio losses for the first half of August.
Second, PJM Members voted to continue stakeholder deliberations of alternatives to PJM Tariff’s current liquidation process for FTR positions held by a member that defaults, which could also potentially apply to the GreenHat default.
Customers purchasing power or selling generation directly or indirectly in the PJM wholesale market will be impacted by the GreenHat default, treatment of the GreenHat FTR positions, and default allocation assessment. It’s important to keep in mind that a PJM Member default is handled through both a membership and a market activity allocation. The membership portion (10%) of allocation is capped at $10,000 annually. The activity allocation (90%) is based on a pro rata share of market activity in the prior three months from the event of default. From a retail customer perspective, PJM charges a default allocation assessment to PJM Members, including those that serve as retail customers’ suppliers (known as Load-Serving Entities at PJM).
If a customer purchases energy under a fixed-priced or other structured energy contract, the customer’s supplier may seek to pass along the costs incurred due to this default allocation. As such, the customer’s contract language should be closely reviewed to determine whether such costs can be collected from the retail customer. Also, those market participants, including customers, with access to FTRs may want to consider the benefits of pursuing strategies to minimize their own default allocation assessment.
McNees is available to assist in reviewing energy supply contracts to assess risks of being charged a portion of the GreenHat default and help understand the impact of the GreenHat default on your company. Please contact Susan Bruce, email@example.com or Amy York, firstname.lastname@example.org for more information or with any questions.