Reforming our markets

1924

By Stu Bresler, senior vice president – Operations and Markets

For nearly a year now, PJM has been discussing with stakeholders the need to reform price formation in our markets. It is vital to ensure that the actions which system operators take to ensure that reliability is maintained are transparently reflected in market clearing prices. There is ample evidence a problem exists.

The spike in uplift during the cold snap at the beginning of this year is symptomatic of the problem: our current method for pricing energy and reserves is not accurately reflecting the cost of resources required to serve load.

Much discussion has focused on the calculation of locational marginal prices. However, it is both necessary and crucial also to focus on the second element: real-time procurement and pricing of reserves. Reforming the way reserves are procured and priced is equally important to ensure that all reliability-related actions taken by dispatchers are transparently reflected in market prices.

The operating reserves markets must change to ensure that operating reserve prices send the correct price signal. Today, when operators call additional resources on line because they see a need for additional reserves, the contrary effect is to suppress energy and/or reserve prices.

That’s the opposite price signal needed in the circumstances. It’s a misalignment of system conditions and market prices.

PJM is proposing to create a real-time 30-minute reserve product, aligned with the existing day-ahead reserve product.

PJM also proposes to make reserve requirements more dynamic. We propose the examination and enhancement of the Operating Reserve Demand Curves used to price reserves when the quantities of those reserves approaches or drops below the established requirements.

The results of operators calling additional reserves onto the system thereby would be signaled in prices, and the market would better reflect the value of reserves on the system especially during times of reserve shortages.

The goal of these proposed reserve procurement changes is to address the misalignment of real-time operations and markets by sending the proper price signal to ensure continued real-time reliability.

We welcome stakeholder discussion and exploration of these concepts in the Operating Committee and the Energy Price Formation Senior Task Force.

We believe stakeholders can thoroughly vet and develop components of these concepts into a final proposal by fall and the remainder by next spring. It is important that, where possible, changes are in place and implemented in time for next winter’s operations with the remainder in place for next summer.