2020 in Review: Adapting Wholesale Markets for an Evolving Grid

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In 2020, PJM and its stakeholders continued to work together to adapt the PJM wholesale electricity markets to serve a rapidly evolving grid, balancing evolving public-policy efforts with the need to maintain resource adequacy.

Capacity Market Auctions Scheduled – MOPR Implementation

Federal Energy Regulatory Commission rulings in 2020 enabled PJM to resume preparations for capacity auctions on hiatus since 2018.

These efforts followed FERC’s December 2019 order governing the Minimum Offer Price Rule (MOPR). The order required administrative price floors for all new, and some existing, resources that receive state subsidies for their participation in capacity auctions.

By November, FERC had signed off on PJM’s compliance filing to implement required capacity market changes, and approved a separate proceeding determining how PJM calculates the energy and ancillary services offset. That forward-looking offset is used, among other things, to establish the minimum offer price in the capacity auction for resources with a state subsidy.

With FERC’s November ruling, PJM was able to commence pre-auction activities for the upcoming auction for the 2022/2023 Delivery Year and set an auction schedule that begins in May 2021.

PJM expects to run subsequent annual auctions on a compressed schedule through 2023, when the traditional annual cadence of capacity auctions can resume.

Reserve Pricing

In May, FERC approved PJM’s proposed rule changes to accurately align the procurement of reserves with their reliability value and to incentivize consistent response when deployed.

PJM filed its proposal in March 2019, and its changes will consolidate the tier 1 and tier 2 synchronized reserve products and align market-based reserve products in Day-Ahead and Real-Time markets, among other improvements. Synchronized reserves are the flexible resources that can supply or withdraw power within 10 minutes. New reserve pricing rules more effectively value the flexibility required for reliability and resource adequacy.

This represented a critical step toward setting up market rules to attract flexible reserves that, in turn, facilitate the reliable integration of renewable resources.

Fast-Start Pricing

Good news on fast-start pricing reform arrived in December, when FERC largely found that PJM’s proposed Tariff revisions and market rules to be just and reasonable, with some compliance issues to be resolved in a subsequent filing. Beginning in January, PJM will work with stakeholders to comply with FERC’s directives.

In April 2019, FERC had ruled that PJM’s pricing practices did not allow fast-start resources to set clearing prices, which reflect the cost of serving load. Fast-start resources are those that PJM has determined are capable of operating within one hour of notification and have a minimum run time (or minimum down time for demand response) of an hour or less.

PJM filed revisions with FERC to its fast-start pricing practices to allow eligible fast-start resources to set locational marginal prices for electricity in PJM’s Day-Ahead and Real-Time Energy markets. PJM’s filing also ensured that resources with the ability to flexibly respond to PJM’s dispatch signals are incentivized to do so by ensuring prices properly reflect their operating costs. This filing, in combination with reserve price reforms, combine to provide incentives for the flexible resources necessary to support the grid of the future.

ARR/FTR Market Task Force

Since its establishment in 1998, the Financial Transmission Rights (FTR) Market has continuously evolved as a forward energy market that allows market participants to lock in congestion costs as a hedge against risk on a monthly or long-term basis. FTR auctions also provide price discovery, inform expectations about future system congestion, and support decision-making for long-term investment in generation and transmission.

An FTR is a right to a stream of revenues when the transmission system is congested in the Day-Ahead Energy Market. FTRs are defined as individual paths – a point-to-point construct from the energy source to sink with the quantity of megawatts defined. An Auction Revenue Right (ARR) is another type of path-based transmission right. ARRs are allocated annually to eligible load serving entities and firm transmission customers in PJM. As designated by PJM, an ARR holder is entitled to receive a payment as a result of the annual FTR auction.

In April, for increased price transparency, PJM increased the frequency of long term FTR auctions from three rounds a year to five rounds.

In 2020, PJM and its stakeholders also established the ARR/FTR Market Task Force to examine this long-standing, critical market and investigate possible reforms. In December, PJM released the results of an independent consultant’s review. This study found that most participants are satisfied with the current market design and suggested incremental improvements. This work positions the ARR/FTR Task Force to resume work in early 2021 based on core market design principles of equity, efficiency, simplicity and transparency.

Carbon Pricing Education & Analysis

Through PJM’s Carbon Pricing Senior Task Force, PJM and stakeholders study and discuss the impacts of carbon pricing under certain constructs. In 2020, states within PJM’s footprint continued to chart their energy futures by policy, mandate and more while markets also evolved. As this transformation continues, PJM views markets as the best way to attract and retain the flexible generation required for continuing resource adequacy.