|
|
|
|
|
PJM Seeks to Allow LMPs to Exceed $1,000/MWh Cap; May Be Easily Gamed
PJM has requested that FERC allow it to not only accept offers in excess of the current $1,000/MWh bid cap applicable to energy, but to allow such offers to set the clearing price.
Already, FERC on Friday accepted PJM's request to provide generators with make-whole payments for verifiable costs in excess of $1,000/MWh, which PJM claimed is needed due to spikes in spot natural gas prices.
FERC said that granting the waiver of current market rules to allow the payments in excess of $1,000/MWh to specific generators, "is necessary to address the reliability concerns posed by the sustained extreme weather currently being experienced in the PJM Region," meaning that customers' billions of dollars paid in compulsory capacity payments do not ensure reliability.
PJM, however, is not satisfied with just implementing make-whole payments for those generators who, due to imprudent hedging, face marginal costs in excess of $1,000/MWh due to spikes in the price of natural gas.
PJM instead wants to allow generators with verifiable costs in excess of $1,000/MWh to be able to set the market-clearing price.
PJM said that the $1,000/MWh cap was, "never intended to force generators to sell below their marginal energy costs, but an unprecedented spike in fuel costs this week (setting new natural gas price records in PJM for the second time in just the past two weeks) has yielded exactly that result."
"It is patently unfair to the affected generators, who should be permitted to recover their costs of generating the energy that they are required to offer into the PJM energy market," PJM said.
What is patently unfair is forcing load to pay for capacity on a forward basis, paying all capacity units but the marginal unit a capacity price in excess of their costs, assuring load that in exchange for such above-cost capacity payments that capacity suppliers will have the obligation to offer energy into the PJM market under current market rules, and then robbing customers of the benefit of such forward capacity procurement by artificially raising the clearing prices because certain generators have chosen to be subject to spot natural gas prices despite knowing that they have an obligation to offer their energy to PJM under the current $1,000/MWh cap.
PJM laments that, "Generators cannot lawfully be required to buy fuel at a cost of many millions of dollars for the purpose of generating power and selling it at a loss."
To the extent any such generators with an obligation to offer energy (due to their capacity supply obligation) have costs which exceed the current offer cap, it is their own fault for imprudent management, and for making a commitment to serve energy in the future knowing full well a $1,000/MWh cap existed. While reliance on spot natural gas might legitimately mean that the marginal cost of generation exceeds the offer cap, no one forced these capacity suppliers to rely on spot natural gas for their fuel. Therefore, it is disingenuous for PJM to say that generators are being "required" to, "buy fuel at a cost of many millions of dollars for the purpose of generating power and selling it at a loss."
If the $1,000/MWh cap is maintained, generators are only being asked to live up to their end of the agreement they entered into in exchange for capacity payments -- to offer energy to PJM under current market rules. If their costs now exceed the applicable cap under current market rules, generators should have managed their risks appropriately to avoid this scenario, or should, in a competitive market, bear the consequences of this decision.
It's bad enough for PJM to reward imprudent hedging with FERC's accepted make-whole payments.
But setting the clearing price based on offers in excess of $1,000/MWh can easily lead to gaming of the market.
Consider a capacity supplier with a diverse portfolio including coal, nuclear, and peaking gas-fired units. It knows that under the extreme weather conditions, all of its units will be dispatched.
It also now knows, if PJM's LMP request is adopted, that if it imprudently does not hedge its gas supply for the peakers, all of its units will now be able to reap a windfall marginal clearing price in excess of $1,000/MWh. While normally, the peakers would be incented to lower their marginal costs to ensure dispatch (or to eliminate exposure to unrecovered costs due to the $1,000/MWh cap), their infrequent run-time, coupled with the waiver of the $1,000/MWh cap, means there is no reason for the peaker to hedge gas supply, while there are now millions of reasons in windfall LMPs, received by other generation owned by the capacity supplier, for the peaker to not limit its costs, so that it can claim it has verifiable costs in excess of $1,000/MWh.
The $1,000/MWh price cap, as well as the requirement for the peaker to provide energy under this cap as a capacity resource, regardless of its own costs, serve as strong deterrents against the behavior just described. PJM is proposing to eviscerate these customer protections.
It is unclear that the behavior described above would be contrary to any market manipulation rules, and if it is, it may only be in the broadest sense, because the actions of the individual generating units are all economic under the scenario. Indeed, PJM, by claiming the necessity of the offer cap waiver, is acknowledging that relying on expensive spot natural gas supplies is an economic and legitimate strategy for generators; therefore, to the extent a generator purposely relies on spot natural gas to lift LMPs of other units in the market, we think it will be hard to suddenly call this behavior illegitimate.
"There is no question that fuel costs are a legitimate marginal cost of generation, and there also is no question that generators that have had to purchase natural gas on the spot market this winter have at times faced extremely high costs for that gas," PJM said (emphasis added).
On the first point, there is no disagreement, but we vigorously dispute that generators "have had" to purchase natural gas on the spot market at excessive prices -- the decision to be exposed to such spot prices was a choice made by such generators, not a mandate.
"Consequently, there is no sound basis for energy prices to ignore those costs," PJM said.
We've identified three: the general inequity imposed on customers shelling out billions in capacity payments, the moral hazard created by PJM's rewarding of behavior that leads to inflated costs transferred to ratepayers, and the incentive for capacity suppliers to intentionally inflate costs of their marginal units in order to raise clearing prices for their economic units, because these marginal units will no longer face unrecovered costs from meeting their obligation to offer energy.
ADVERTISEMENT Search for more retail energy careers: Copyright 2010-
January 27, 2014
Email This Story
Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
NEW Jobs on RetailEnergyJobs.com:
• NEW! -- Sr. Dir./Director of Online Marketing -- Retail Provider -- Houston
• NEW! -- Regional Sales Manager -- Retail Supplier -- Texas -- Houston
• NEW! -- Director of Supply - Risk Manager -- Retail Supplier
• NEW! -- Channel Sales Manager -- Retail Provider
• NEW! -- Contract Analyst (aka Pit Crew) -- DFW
• NEW! -- Regional Sales Manager -- Retail Provider -- NY, PA, & IL
• NEW! -- Writer/Content Producer -- Energy Consultant/Manager -- Houston
• Retail Energy Business Analyst/Manager -- DFW
RetailEnergyJobs.com
|
|
|
|