Task Force to Vote on Energy Reserve Price Formation Proposals Jan. 23

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With a Jan. 31 deadline looming, stakeholders on Thursday examined key differences among several proposals to revamp energy reserve pricing rules as directed by the PJM Board of Managers.

PJM’s existing method of pricing reserves does not accurately reflect the cost of serving customers, especially when the bulk power system is stressed, PJM President and CEO Andy Ott has said. This mismatch can lead to hefty uplift payments – out-of-market compensation made to generators so they can recover their costs under specific conditions when PJM instructs them to change their operations in order to meet electricity demand.

In addition to PJM, Monitoring Analytics, the independent market monitor; Calpine; and the Office of People’s Counsel of Washington, D.C. (PC-DC), have drafted plans. (See how they compare in this Excel matrix.)

Wilson Energy Economics also has proposed two components – a shortage pricing “circuit breaker” and shortage pricing transparency – that could be incorporated into any of the packages, but so far, only the PC-DC has chosen to do so.

The Energy Price Formation Senior Task Force plans to vote on the proposals at its Jan. 23 meeting, and the packages discussed at Thursday’s session may be further refined by then. On Jan. 24, the Markets and Reliability and Members committees are scheduled to vote on the issue, in order to provide member input to the Board of Managers for its February meeting.

The PJM Proposal

Among other reforms, PJM proposes to:

  • Consolidate Tier 1 and Tier 2 synchronized reserves into a single product that will be obligated to respond to dispatch instructions during a synchronized reserve event, be compensated for their participation and be subject to non-performance consequences.
  • Define several reserve sub-zones to address locational reserve needs and allow flexibility to change which one is used at any one time.
  • Align market-based products in Day-Ahead and Real-Time energy markets.
  • Refine the Operating Reserve Demand Curve and apply it to both markets.
  • Increase the “penalty factor” – or maximum price paid to reserve resources – from $850 to $2,000 per megawatt hour.
  • Introduce a transitional mechanism for the Capacity Market’s Energy and Ancillary Services Revenue Offset to reflect expected changes in revenue in determining the Net Cost of New Entry (the first-year revenue a new resource would need to earn in the capacity market).

The Calpine Proposal

Calpine’s proposal is identical to PJM’s in all respects but one: It does not recommend creating a transitional mechanism for the Capacity Market’s Energy and Ancillary Services Revenue Offset.

The PC-DC Proposal

The PC-DC proposal differs from PJM’s on the penalty factor, which it wants to keep at $850/MWh, with increases considered only under extreme shortage conditions.  Additionally, the transition mechanism would include a “true-up” payment.

It also would incorporate the components offered by Wilson Energy Economics:

  • The “circuit breaker”: In order to avoid costly unintended consequences of shortage pricing due to such factors as substantial loss of generation, market design flaws or market participant conduct, this concept would establish fall-back market rules that would be invoked by a pre-defined trigger in order to protect against consumer losses.
  • Shortage pricing transparency: The idea behind this concept is to inform the public during times of scarcity so that they can choose not to consume electricity, and therefore not to pay higher prices.

The Independent Market Monitor’s Proposal

Monitoring Analytics has presented the most comprehensive alternative to PJM’s proposal, with a number of differences. Among them:

  • The ORDC is more conservative.
  • The maximum price would be $1,000/MWh, unless PJM has approved a higher cost-based offer. The price would increase by $250 per MWh increments with higher approved cost-based offers, up to $2,000/MWh.
  • Day-ahead scheduled reserves would be eliminated.
  • Demand response resources would participate under the same rules as generators.
  • Changes to the Variable Resource Requirement curve in the Capacity Market would be required.
  • Proposal would impose a synchronized reserve must-offer penalty.