2023 in Review: Market Reforms Serve Reliability Needs of the Energy Transition


PJM acted on multiple fronts in 2023 to evolve market rules as part of its ongoing initiative, Ensuring a Reliable Energy Transition, which outlines PJM’s concerns over long-term reliability, documents the actions to be taken immediately and in the future, and tracks those results.

The need to address both immediate and longer-term reliability needs was underscored by PJM’s February 2023 report, Energy Transition in PJM: Resource Retirements, Replacements & Risks (PDF), which documented resource adequacy concerns driven by the confluence of growing electricity demand, rapid retirement of existing generation resources, and the slow pace of construction of new generation.

As a result of this study and input from stakeholders and regulators, the PJM Board of Managers directed PJM and stakeholders to launch an expedited Critical Issue Fast Path (CIFP) process to consider and propose market rule changes aimed at ensuring resource adequacy and preserving reliability. The work of the CIFP was also informed by PJM’s Winter Storm Elliott Event Analysis and Recommendations Report (PDF), which provided 30 recommendations that included market-related changes.

The main focus of this accelerated stakeholder process was on the Capacity Market, PJM’s most effective tool for incentivizing the investment in new generation resources (and retirement of less efficient generators) through the a competitive market structure.

FERC Filing for Comprehensive Market Reform

As a result of the CIFP, PJM filed a comprehensive set of reforms with FERC in October. The suggested reforms sought to:

  • Enhance how PJM accounts for generator reliability-related risk in its models and sets procurement targets.
  • Advance an accreditation framework for all resources to reflect the actual capacity value that those resources provide.
  • Reform certain rules for generator performance during system emergencies.
  • Revise the Market Seller Offer Cap (MSOC) and the Minimum Offer Price Rule to better include costs of taking on capacity obligations and adopt a forward-looking Energy & Ancillary Services Offset.
  • Enhance rules related to a unit-specific MSOC.
  • Better align Fixed Resource Requirement and Capacity Market rules.

PJM expects FERC to rule on these proposals by early February 2024, which would allow PJM to conduct the 2025/2026 Base Residual Auction in June 2024, as currently scheduled.

Broad Support: Winter Storm Elliott Settlement

Winter Storm Elliott had additional ramifications for the market in 2023, involving the calculation of payments and charges to generation owners during the storm. PJM’s Capacity Performance rules reward resources that perform above their commitments during emergencies and penalize resources that do not perform up to their committed levels. Bonuses for over-performers come directly from the charges levied on underperformers.

This was the first systemwide implementation of the Capacity Performance rules since its inception in 2017 and resulted in an assessment $1.8 billion in non-performance charges. This amount was negotiated to approximately $1.25 billion in a landmark, unopposed settlement between PJM and 81 other settling parties. FERC described the settlement as “fair, reasonable and in the public interest,” when approving it in December.

PJM also updated its Capacity Performance rules to better reflect actual system conditions and needs from generation resources during future extreme grid events.

Capacity Market Results

Meanwhile, the 2024/2025 capacity auction, or Base Residual Auction, was finalized on Feb. 27, 2023, after FERC approved a PJM proposal to address a unique set of circumstances discovered during the auction’s clearing process that would have otherwise resulted in unjust and unreasonable results in the Delmarva South Locational Deliverability Area.

The 2024/2025 auction secured adequate resources to meet demand for the 2024/2025 Delivery Year, with prices down in the RTO and up in areas with local constraints that indicated tightening conditions in certain areas.

The auction results showed that, despite a healthy reserve margin today, a number of areas are becoming constrained with higher prices. The auction had approximately 2,000 fewer megawatts offered than the previous auction, continuing a three-year trend of a decreasing number of megawatts offered. A continuation of this trend would present a potential concern for long-term resource adequacy as outlined in PJM’s Energy Transition in PJM: Resource Retirements, Replacement and Risks study described above.

PJM also delayed the 2025/2026 capacity auction to June 2024 to capture market reforms proposed through the accelerated CIFP process that resulted in a comprehensive reform proposal to FERC in October.