2018 in Review: Markets Prove Value

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If 2018 demonstrated one thing, it was the value of the PJM wholesale markets.

Thanks to the markets, PJM’s grid enjoys reserve margins of 23 percent with a generation fuel mix of natural gas, nuclear, coal and renewables that is more diverse than ever. The PJM markets have facilitated an unprecedented switch to advanced technologies in natural gas generation, demand response, energy efficiency and renewable energy, which have helped reduce the region’s carbon emissions by 30 percent over the last decade.

The market is not static, however. It evolves as the industry does and will continue to develop as we move into 2019. The market is an intricate structure with a number of interconnecting components; a fact reflected in the complex issues that PJM and its members faced in 2018.

PJM President and CEO Andy Ott addressed some of these challenges when he testified before the United States Senate in January and again in October – reforming and improving the markets, melding state policy while preserving market integrity, and properly valuing the reliability attributes of generation resources in PJM’s Energy Market and Reserve Market.

Reserve Pricing

In 2017 PJM began discussing with stakeholders the need to reform price formation in its markets, noting that it is vital to the successful operation of the grid that the actions system operators take to maintain reliability are properly valued in the market.

In April 2018, the PJM Board asked stakeholders to focus on Energy and Reserve market pricing issues where there is broad agreement on the need for change. As described by Andy Ott in a letter to stakeholders, PJM’s current Reserve Market rules do not compensate reserve resources on par with their value in maintaining a reliable system or provide appropriate financial incentives for those resources to respond when called upon.

PJM and its stakeholders, through the Energy Price Formation Senior Task Force, worked on the issue for most of 2018, but were not able to reach consensus. As a result, in December, the PJM Board sent a letter to members requesting a proposal by Jan. 31, 2019. In the absence of a proposal by that time, the Board stated, it will consider filing its own proposal with FERC. The members of the Energy Price Formation Senior Task Force have scheduled meetings throughout January to work on a proposal.

Reconciling State Policy and the Markets

For the past several years, FERC has been trying to account for state policies promoting certain sources of electricity – such as nuclear, wind or solar – while maintaining the integrity of the wholesale electricity markets that have helped maintain a reliable, affordable electrical grid for the 65 million people served by PJM.

The question of reconciling state policy and the markets is critical because it involves the convergence of sometimes conflicting forces. The 13 states and District of Columbia served by PJM may want to determine how their electricity is produced to meet environmental, economic or political goals, while subsidies that are sometimes the result of these state policies can disrupt the wholesale electricity market that has delivered enormous benefits for customers and businesses for 20 years.

PJM and its stakeholders worked for more than a year on how to address state public policy programs that promote state-specific objectives through some form of subsidy for generation that participates in PJM’s competitive capacity market. PJM’s capacity market, called the Reliability Pricing Model, ensures long-term reliability by securing the appropriate amount of power supply resources needed to meet predicted energy demand in the future.

In April, PJM submitted two separate proposals to FERC to address that conflict.

In June, FERC rejected both of PJM’s proposals and declared the PJM capacity market “unjust and unreasonable” as currently designed. FERC ruled that PJM’s existing market rules do not fairly account for the effect of subsidies – such as state programs supporting nuclear or renewable energy – on the operation of PJM’s capacity market.

FERC directed PJM to come back with a proposal that respects states’ authority to support their own policies while maintaining the integrity of the market. FERC suggested PJM adapt an existing market rule that allows some generation resources to be carved out of the capacity market along with a corresponding amount of megawatts they would be responsible for serving.

PJM’s response, developed with stakeholder input and filed in October 2018, strikes a reasonable balance of providing flexible options to companies that are entitled to certain subsidies while protecting the regional market against the impacts of these subsidies. The proposal is pending before FERC, which is expected to rule in early 2019 for incorporation in the PJM capacity auction, which has been pushed from May to August 2019 to provide time for FERC to consider the matter.

Capacity Auction Results

PJM’s capacity market, called the Reliability Pricing Model, ensures long-term reliability by securing the appropriate amount of power supply resources needed to meet predicted energy demand in the future. PJM’s capacity market procures generation capacity three years before it is needed through a competitive auction, allowing enough lead time for investment to be made in resources. The auction is one of the essential elements of a capacity market.

The successful Base Residual Auction in May 2018  – the second in which stricter performance standards applied to all resources cleared – also demonstrated that the markets are working as intended. The auction procured diverse and competitive resources, ensuring that PJM can continue to provide electricity reliably with increasing efficiency and at the lowest-reasonable cost.

PJM procured 163,627 megawatts of total resources for 2021/2022, with a price of $140/megawatt-day for most of the PJM footprint.

The auction attracted a year-to-year increase in the amount of demand response, energy efficiency and renewable resources that committed to meet PJM’s strict performance standards. A total of 11,126 MW of demand response cleared in the auction, representing an increase of 3,305 MW compared to last year’s auction. A total of 2,832 MW of energy efficiency also cleared, an increase of about 1,100 MW. A total of 1,417 MW of wind cleared in the auction, representing an increase of 529 MW.

Variable Operations and Maintenance Costs and the Quadrennial Review

PJM’s tariff requires a formal review every four years to examine:

  • The shape of variable resource requirement (VRR) curve (also called the demand curve): The VRR curve determines the maximum price required to attract the resources needed to serve the PJM grid in general and sub-regions where congestion results in higher prices.
  • Cost of new entry: The net cost of new entry (CONE) represents the capacity revenue that a new generator would need to be willing to enter the market.
  • Net Energy and Ancillary Services Revenue Offset (E&AS Offset) methodology, which provides an estimate of the non-capacity revenues that a generator can expect to earn. PJM believes that changing methodology will more accurately capture the actual economics and expectations of future E&AS used in decision making regarding new entry into the PJM market.

Variable Operations & Maintenance Costs are one component of the CONE calculation evaluated during the Quadrennial Review. The costs a generator may include in cost-based energy market offers can have an impact on bids. Determining which costs may be used was examined as part of the evaluation of the Quadrennial Review’s CONE calculation for the reference resource. A reference resource is representative of a peaking unit in the energy market that derives a significant portion of its revenues from the capacity market. A peaking unit is a power generator that operates mostly during times of high demand. The reference resource is meant to reflect a realistic standard on which to base the cost of new entry, and impacts the shape of the VRR curve and hence the price required to acquire the needed capacity.

In October, PJM filed with FERC its package for the Quadrennial Review of VRR curve parameters. At the same time, the PJM Board also voted to file proposed changes to its Operating Agreement based on PJM’s updated VOM costs proposal. Stakeholders spent months working on VOM costs proposals, but their solutions did not pass the Members Committee.

Five-Minute Settlements

Following a year-long development and testing program with stakeholder input, on Apr. 1, 2018, PJM implemented a market settlements solution that better aligns market credits and charges with real-time dispatch. This enhanced market settlement solution – also known as Five-Minute Settlements – was developed and implemented in response to FERC Order 825, which requires the alignment of market settlement timeframes with dispatch decisions.

For PJM, the biggest changes were in the Real-Time Energy Market, which now settles every five minutes instead of every hour. This is a major step forward in more accurately compensating resources for following PJM’s operational directives.

Enhancing Market Participation for Energy Storage Resources

On Dec. 3, 2018, PJM filed a proposal to facilitate the participation of energy storage resources in PJM’s capacity, energy and ancillary services markets in compliance with FERC Order 841. The order, issued in Feb. 2018, requires all regional transmission organizations and independent system operators to remove barriers currently faced by such resources, allowing the resources to compete in all markets to the extent that they are technically capable of participating.

PJM’s proposed participation model gives these resources greater flexibility in managing their operations in the system when charging, discharging or providing continuous electrical service across their full dispatchable range. The model also ensures that such resources are capable of, and responsible for, performing in the markets in which they elect to participate.

Extended Deadline to Submit Day-Ahead Bids and Offers

In December, FERC approved PJM’s revisions to extend the deadline for participants to submit bids and offers in the Day-Ahead Energy Market from 10:30 a.m. to 11:00 a.m. The extension better aligns PJM’s market deadlines with those of natural gas pipelines. Specifically, it provides additional time for generators (natural gas generators, in particular) to interact with natural gas markets and gives them more price certainty when purchasing fuel. The deadline extension is part of PJM’s ongoing work to enhance gas/electric coordination.

Read more about PJM’s gas/electric coordination efforts in the Learning Center.