Energy Price Formation Task Force Fast-Tracks Proposals

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Four proposals addressing energy reserve pricing issues head to the Markets & Reliability Committee (MRC) Thursday for a first read as stakeholders galvanize to meet a Jan. 31 deadline recently imposed by the Board of Managers to come up with a plan.

The packages have yet to be fleshed out, but will serve as procedural placeholders, allowing the MRC an opportunity to vote on detailed plans at its subsequent meeting on Jan. 24. The results of that vote would inform the Board of Managers when it meets in February.

The Energy Price Formation Senior Task Force has been working for nearly a year to identify ways to enhance energy and reserve pricing so that prices accurately reflect the true cost of serving electricity demand and minimize the need for out-of-market uplift payments.

The Board in an April letter requested the group address reserve procurement and shortage pricing in particular by the end of the third quarter. After 17 meetings, however, the task force hadn’t reached consensus on a plan, running into roadblocks on topics such as operating reserve demand curve (ORDC) reform.

On Dec. 5, the Board asked the group to revisit its work and devise a proposal by Jan. 31. In a letter to stakeholders, Chair Ake Almgren said that absent consensus, the Board would consider filing its own proposal with the Federal Energy Regulatory Commission after that date. (See Board Directs PJM, Stakeholders on Reserve Pricing.)

The Board is looking for a comprehensive package of reserve market reforms that reflect six elements, said the Senior Task Force’s facilitator, Dave Anders, director – Stakeholder Affairs, at the group’s meeting on Friday.

Two of the concepts had not yet been addressed by the task force:

  • Alignment of market-based reserve products in day-ahead and real-time energy markets
  • Increased penalty factors to ORDCs to ensure utilization of all supply prior to a reserve shortage

The task force spent much of the day-long meeting receiving education on and discussing those items, and reviewing PJM’s proposal. Monitoring Analytics, PJM’s independent market monitor, is expected to sponsor two alternatives, and the Office of the People’s Counsel of Washington, D.C., intends to present another.

The EPFSTF will hold four more sessions, on Jan. 4, 11, 17 and 23. The meetings are expected to run from 9 a.m. to noon, and members hope to complete a non-binding poll on the packages.

PJM President and CEO Andy Ott has called reserve pricing reform “critical to the ongoing evolution of our energy market.”

The existing method for pricing reserves and energy does not truly reflect the cost of serving customers, especially when the system is stressed, Ott told the MRC Dec. 6.

A key part of the equation that is out of sync is uplift payments. These are out-of-market payments made to generators so they can recover their costs under specific conditions when PJM instructs them to change their operating schedule in order to make sure there is enough electricity to meet demand.

On a normal day, uplift averages around $389,000. During last winter’s cold snap, these charges skyrocketed to an average $4.3 million per day, for a total of $47 million. One day alone reached nearly $9 million.

During the Polar Vortex of 2014, the uplift costs were staggering: a total of $555 million for the month of January.