2021 in Review: PJM Strengthens and Expands Risk Management Best Practices

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In 2021, PJM continued strengthening its risk mitigation efforts that support operations, planning, wholesale electricity markets and trading participants.

Risk, increasingly, may be amplified by market conditions, unforeseen weather, threats, and the operational and generational characteristics of the complex, rapidly evolving grid. In light of evolving best practices, PJM established, developed and/or applied prudent, industry-standard risk management practices to all aspects of our business.

As part of this work, PJM:

  • Collaborated with other grid operators, our regulators, member states, stakeholders and industry participants to advocate for optimum, benchmark practices
  • Launched the PJM Risk Management Committee, a new senior committee that extends consideration of varied aspects of risk across all grid functions and markets within the consensus-driven PJM stakeholder process
  • Incorporated a comprehensive Enterprise Risk Management approach throughout PJM’s processes and departments to identify, assess, measure, monitor and manage material risks to PJM’s business objectives
  • Completed the work plan of the Financial Risk Management Senior Task Force to enhance credit risk and collateral management as directed by the PJM Board of Managers in 2019

Forward-looking FTR Market Reform

In October, PJM stakeholders reached consensus on a proposal to establish revised initial margin methodology and collateral requirements in the Financial Transmission Rights markets.

Initial margin is a collateral deposit posted by a market participant to protect against the consequences of default. The transparent, independently validated model would establish a 97% confidence interval for collateral requirements, using industry standard methodology based upon market volatility across a market participant’s entire portfolio.

Also in 2021, PJM and its stakeholders explored the benefits and drawbacks of a stakeholder proposal to mitigate risk via external clearing of the FTR market. Ultimately, stakeholders concluded that moving the clearing function to an external entity was not warranted and that the current FTR market construct was functioning properly, subject to ongoing review and enhancements.

Considering Risk Holistically Across the Broader Grid

As comprehensive consideration of risk across PJM continued in 2021, PJM Chief Risk Officer Nigeria Bloczynski was invited to offer testimony to the Federal Energy Regulatory Commission on this evolving discipline. Clearer direction is needed, she said, to improve communication among RTOs/ISOs about issues, especially those involving market function and participation, to increase transparency and help mitigate risk on a broader scale.