Board Directs PJM, Stakeholders on Reserve Pricing  

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The PJM Board of Managers has asked stakeholders to revisit their work on reserve pricing and develop a proposal by the end of January.

If PJM and members cannot come to a consensus by Jan. 31, the Board will consider filing its own proposal with the Federal Energy Regulatory Commission (FERC), PJM President and CEO Andy Ott told the Markets & Reliability Committee (MRC) Thursday morning.

In a letter to members on Wednesday, the Board told members it has directed PJM management to work with stakeholders on a comprehensive package and determine areas where consensus can be reached.

If timely consensus cannot be achieved, the Board stated, it will direct PJM management to make a Section 206 filing with FERC to address the reserve procurement and pricing issues.

On Thursday, Ott said reserve pricing has been an issue since the Polar Vortex of early 2014, and that reserve pricing reform is “critical to the ongoing evolution of our energy market.”

Last winter, the grid demonstrated its reliability during a cold snap, but a spike in uplift charges showed that the existing pricing method for reserves and energy is not reflecting the true cost of serving load, especially when the system is stressed.

Uplift payments are made to market participants for operating a unit under specific conditions as directed by PJM to ensure that they recover their total offered costs when market revenues are insufficient or when their dispatch instructions diverge from their dispatch schedule. For example, during stressed conditions, PJM may ask resources that were not scheduled to provide electricity to run in order to ensure that sufficient generation and reserves are available. Those resources are needed to serve the demand, but they are being paid outside of the market, resulting in an inefficient market-price signal.

On a normal day, uplift averages around $389,000 per day. During the cold snap of last winter, uplift charges skyrocketed to an average $4.3 million per day, for a total of $47 million. The day with the highest amount of uplift reached nearly $9 million.

“There is plenty of evidence that when the system is experiencing stress that we are seeing a lack of an ability of the energy market to price out-of-market actions,” Ott told the MRC.

This dynamic “mutes price transparency, shifts costs unfairly to consumers who have prudently hedged, and limits competition to secure reserves at the least cost to consumers,” the Board stated in its  letter Wednesday.

PJM has looked at reserve markets in other regions where design changes have been effectively implemented, and a number of those elements are included in PJM’s proposals. While there appears to be widespread agreement that improvements to reserve markets are necessary, the Board stated, stakeholders have not been able to reach consensus on specific proposals.

The Energy Price Formation Senior Task Force group, which convened in January, was unable to come to consensus thus far, running into roadblocks on topics such as operating reserve demand curve reform.