Tuesday, March 19, 2019

PJM Advances Own Energy Price Formation Plan

With Tweaks, Board Approves Section 206 Filing with FERC

By Christen Smith

The PJM Board of Managers agreed to submit staff’s revised energy price formation proposal for FERC approval, CEO Andy Ott said Wednesday.

“PJM will review the agreement language with stakeholders prior to filing, and we look forward to that opportunity,” he said in an email to members the day after the board’s meeting Tuesday. “The board thanks stakeholders for their engagement and their ongoing support on this important matter.”

He said the Federal Power Act Section 206 filing will happen within the next few weeks.

Left to right: PJM CEO Andy Ott and his liaison Eric Hsia, and board members O.H. Dean Oskvig and Terry Blackwell at January’s MRC meeting. | © RTO Insider

The plan, advanced at the recommendation of the board’s Competitive Markets Committee — with input from both the Independent Market Monitor and members’ Liaison Committee — includes the following from PJM’s proposal:

  • Consolidation of Tier 1 and Tier 2 synchronized reserve products;
  • Improved utilization of existing capability for locational reserve needs;
  • Alignment of market-based reserve products in day-ahead and real-time markets;
  • Downward sloping operating reserve demand curves (ORDCs) for all reserve products; and
  • Increased penalty factors to ORDCs to ensure utilization of all supply prior to a reserve shortage.

2 Changes

The board recommended two changes after lengthy discussions with stakeholders, including a Liaison Committee meeting Feb. 11.

The board directed PJM to adjust its assumptions regarding generator forced outage rates based on feedback from the Monitor, which said staff were being overly conservative. The board also ordered the RTO to increase the cap on demand response that may be assigned as synchronized reserves to 50% of the requirement.

PJM’s proposal replaces the current stepped ORDC with a sloped curve; the first horizontal segment would represent the minimum reserve requirement, with the downward sloping curve based on the probability of reserves falling below the minimum reserve requirement (PBMRR) in real time based on uncertainties. The PJM proposal also increases the price for the initial horizontal segment of the curve to $2,000/MWh, up from the current $850.

The filing will not include a transitional adjustment to the energy and ancillary services offset in the capacity auction.

The announcement comes one week after stakeholders tried and failed to get consensus on a sixth compromise proposal. (See Last Gasp Bid on PJM Price Formation Falls Short.) Calpine’s David “Scarp” Scarpignato led an informal group of stakeholders in attempting to piece together the compromise after five proposals fell short of the two-thirds threshold at the Jan. 24 Markets and Reliability Committee meeting. (See PJM Stakeholders Deadlock on Energy Price Formation.)

During a special session of the Members Committee on Feb. 6, PJM’s Stu Bresler said the FERC filing will likely come in early to mid-March, with a June 1, 2020, “reasonable target” date for implementation.

Opposition Likely

PJM’s filing is certain to be opposed by load interests concerned about the cost of the changes. The proposal received only 31% support in a sector-weighted vote at the MRC, with no ‘yes’ votes from End-Use Customers and only one vote out of 28 from Electric Distributors. It was supported by 60% of Transmission Owners and almost half of Generation Owners and Other Suppliers.

A PJM white paper published in December projected that staff’s plan — before the two changes ordered by the board — would boost energy and reserve market revenues by $1.92 billion annually, with energy revenues up $1.8 billion (increasing average LMPs by $2.27/MWh) and reserves increasing by $190 million. Uplift was projected to drop by $70 million.

The RTO expects the additional costs will be at least partially offset by reduced capacity costs. It said the most optimistic case would result in annual cost savings to consumers of $350 million.

“A potentially more realistic outcome is that these changes will increase costs to loads in the range of $700 million,” the RTO said. “PJM believes these changes are justified because much of the reserve capability PJM has today is either undercompensated or not compensated at all.”


Many stakeholders bristled at the board’s Dec. 5 letter setting a  Jan. 31 deadline for the conclusion of members’ deliberations on the issue. (See PJM Demands Action on Energy Price Formation.)

“PJM has detailed its concerns with current energy and operating reserve pricing mechanisms but has not justified the urgency of resolving these concerns, established the operational and cost effectiveness of its solutions, or adequately evaluated the risks and rewards of its proposed reforms,” said Michael Richard, president of the Organization of PJM States Inc. (OPSI) in a letter dated Jan. 29. “It seeks to institute new market structures under an unnecessarily rushed timeline, allowing little opportunity for its staff to generate the analyses necessary for stakeholders to fully understand the potential impacts these proposals will have on market sellers and consumers, gauge the reasonableness of the proposals or develop alternatives.”

The Sustainable FERC Project, meanwhile, filed a letter of opposition Feb. 4 on behalf of the Sierra Club Environmental Law Program, the Union of Concerned Scientists and the Clean Energy Program that said proposals by  PJM and others  “neither consider the existing demand response reserves committed on the system, nor provide a mechanism to compensate those demand resources for the reserve services they are providing.”

“PJM’s energy reserve reform package would unacceptably delay fully and efficiently utilizing the capabilities of clean energy technologies to serve system needs,” the letter reads. “Over 68% of load served in PJM is located in states that have clean or renewable energy targets that become increasingly ambitious in coming years. It is no longer acceptable for consideration of clean energy technologies to be relegated to an afterthought.”

The board also heard earlier from executives of FirstEnergy, Exelon, Duke Energy and Public Service Enterprise Group, who criticized the RTO for failing to implement energy and capacity market rule changes despite a decade of stakeholder discussions. (See Utility CEOs Urge PJM Board to Act on Price Formation.)


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