The value of markets


By Stu Bresler, senior vice president — Operations and Markets

Coming out of PJM Interconnection’s Annual Meeting of Members last week, one thing was clear: Today, we have a strong grid, built on a foundation of reliability, cost-efficiency and innovation spurred by free-enterprise competition.

The PJM system is more reliable than ever, with robust reserve margins, and continues to incent significant private investment in new resource technologies. All of this is occurring while experiencing decreasing emissions at historically low wholesale electricity prices.

If you want to know how we got here, look no further than the wholesale markets.

Thanks to the markets, PJM’s grid enjoys reserve margins of 23 percent, and our resource mix is more diverse than ever. In addition, the PJM markets have facilitated an unprecedented fuel and technology switch from older, less-efficient resources to advanced, increasingly efficient resources including demand response, energy efficiency and renewable energy.

Owners of some older generators have argued that electricity markets are flawed because their assets cannot compete, and the replacement of less efficient plants by new, state-of-the art generators results in a less reliable, less resilient grid. That’s just not the case.

The competitive wholesale electricity markets grew out of a desire to better control electricity costs for consumers, especially business customers, following a period of escalating rates and rate shocks when high-cost new generating plants came online. Legislators and regulators saw competition among electricity suppliers as a means to control electricity prices. They saw that, over the long term, the discipline of competition would lead to lower wholesale electricity prices than would result from regulation alone.

While market rules always need to evolve in response to changes in the broader energy industry, the reality is that markets have done exactly what they were created to do, and they continue to offer proven solutions to changes in the industry and to new public policies. Consider:

  • Wholesale electricity prices are lower than they’ve ever been; from 2008 to 2017, wholesale electricity prices in PJM fell by more than 40 percent.
  • Competition has required generators to operate more efficiently while also introducing new, more efficient technology, resulting in more than $1.4 billion in annual savings.
  • The markets are the most powerful tool for attracting investment in infrastructure, new generation and new technology at the lowest reasonable cost.
  • Markets shift the risk of building generators from consumers to investors, who are in the best position to balance investment decisions with risk.

As the energy industry continues to evolve, competitive markets remain the best mechanism for maintaining a reliable system and ensuring a resilient grid into the future. As concerns or potential risks are identified, they can be solved with market mechanisms.

The markets have the proven ability to address reliability issues. After generators failed to perform during the 2014 polar vortex, PJM instituted a system of market incentives and penalties that has improved reliability. The recent cold snap from December 28, 2017, through January 7, 2018, demonstrated that those changes resulted in a significant reduction of forced/unplanned generator outages this winter compared to the winter of 2014.

With new technology have come decreased emissions. Since the inception of the PJM market in 1997, emissions are at a 20-year low, and competition and incentives for more efficient generators have produced a 30 percent reduction in emissions since 2005.

Today, some generators that are not able to successfully compete in the markets are asking for subsidies. PJM’s Independent Market Monitor, Monitoring Analytics, has noted that such subsidies threaten the viability of the markets that have achieved stability, efficiency, innovation and investment.

“The fact that some plants are uneconomic does not call into question the fundamentals of PJM markets. Many generating plants have retired in PJM since the introduction of markets and many generating plants have been built since the introduction of markets,” according to the recent State of the PJM Market Report by Monitoring Analytics.

While wholesale electricity prices are at historic lows, subsidies increase costs to consumers. If subsidies become more widespread, they could compromise the markets’ ability to promote investor confidence to attract new entry and efficiently ensure reliability.

We have acknowledged the concerns raised by officials and regulators about the long-term resilience of the electrical grid. In a March 2017 report, PJM concluded that the PJM system can remain reliable with the addition of more natural gas and renewable resources, but that over-reliance on any one resource type raises questions about electric system resilience that are beyond existing reliability standards.

PJM continues to address long-term resilience questions. We announced last month a plan to analyze a specific component of resilience – fuel supply security – to determine the degree of risk to the grid from interruptions in fuel supply systems in certain extreme contingency scenarios, such as physical- or cyberterrorism and extreme weather. The PJM analysis will define risks in the fuel supply and delivery system to critical generators and develop criteria that can be incorporated in a fuel-neutral way into the market, if necessary.

In considering our energy future, we should keep sight of the not-so-distant past, in the days before wholesale competition, when consumers sought retail relief from skyrocketing electricity prices. Wholesale electricity markets have resulted in lower wholesale costs and increased reliability, and they have and will continue to evolve in the face of challenges, changes and advances in the industry.

The markets are working. Let’s keep it that way.