FERC Adopts Changes To PJM Reserves Market That Could Lead To Prices As High As $10,000/MWh

Addresses Effective Date For Market Changes

May 20, 2020

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Reporting by Paul Ring • ring@energychoicematters.com

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FERC has adopted changes to PJM's reserves market proposed by PJM that could see reserves prices reach $10,000 per MWh.

FERC said that, "Demand for reserves within PJM’s market is represented by the ORDCs [Operating Reserve Demand Curves], which are tied to the NERC-mandated reserve requirements. We agree with PJM that its existing ORDCs, and the various reserve requirements on which they are based, fail to reflect the universe and magnitude of the operational uncertainties with which PJM operators must contend. As evidence of this shortcoming, PJM describes the biasing and out-of-market actions its operators regularly take to procure quantities of reserves in excess of those determined by the ORDCs."

PJM proposed to consolidate the Tier 1 and Tier 2 reserve products into one uniform Synchronized Reserve product

FERC accepted this change

"We adopt as part of the just and reasonable replacement rate PJM’s proposal to consolidate the existing Tier 1 and Tier 2 reserve products into a uniform Synchronized Reserve product with a single clearing price," FERC said

Specifically, under the changes, FERC adopted PJM’s proposal to establish a Reserve Penalty Factor of $2,000/MWh for all reserve products

"We note that PJM’s proposal to allow Reserve Penalty Factors to stack could result in reserve prices as high as $10,000/MWh," FERC said

As a result, the energy and reserve price could rise as high as $12,000/MWh

Direct Energy filed comments in support of PJM's proposal, stating that the changes, "will ensure better price formation and a just and reasonable reserve market construct."

Other integrated generators-retail suppliers also supported the changes, with Exelon stating that the changes would reduce uplift

Direct Energy had noted, however, that the changes represent, "a dramatic change in market design."

"Accordingly, Direct Energy requests that in approving the Proposed Revisions, the Commission allow sufficient time -- e.g., a minimum of six months -- to implement the market rule changes after Commission acceptance so market participants have the time to make necessary changes to their own internal processes to account for the new market rules," Direct Energy had said in its comments

With respect to the effective date of the changes, FERC ordered PJM to submit a compliance filing and directed PJM to propose, "an effective date as early as practicable that will allow it sufficient time to implement the revisions directed herein, including any necessary software changes."

Various state regulators, including the Pennsylvania PUC, had opposed PJM's proposed reserves market changes

Due to the significant changes in reserve pricing, FERC ordered changes to the energy and ancillary services offset (E&AS Offset) that is part of PJM's capacity market.

FERC found that a backward-looking E&AS Offset is now unjust and unreasonable given the magnitude of the changes in the reserves market.

FERC ordered PJM to implement a forward-looking E&AS Offset within 45 days.

"We find that a forward-looking methodology for determining the E&AS Offset will allow changes to energy and ancillary services revenues stemming from energy market design modifications to be more readily incorporated into capacity market parameters and prices," FERC said

Docket Nos. EL19-58-000 et al.

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