FERC Approves Increase in PJM Offer Cap, Allows Shortage Pricing Up To $3,700/MWh

FERC approved as-filed PJM's proposal to increase its energy market offer cap to $2,000/MWh with no changes to the current shortage pricing mechanism, which means that energy market prices may rise to $3,700/MWh.

While there was general stakeholder consensus about increasing the offer cap to $2,000/MWh, certain load interests, such as the Pennsylvania PUC, had said that an increase in scarcity prices did not necessarily reflect the agreement reached through the stakeholder process regarding raising the offer cap.

The Pennsylvania PUC warned that an increase in the maximum scarcity price (from $2,700/MWh) could adversely impact retail customers in Pennsylvania if extreme weather conditions or transmission outages occur for significant periods of time, resulting in scarcity conditions where the $3,700/MWh maximum scarcity price is reached and sets LMP.

The PUC noted that, "transmission outages, which could be sustained for significant lengths of time, that are unrelated to generator performance incentives, could result in sustained scarcity conditions where the $3,700/MWh MSP [Maximum Scarcity Price] level is reached and could set LMP for extended time periods."

However, FERC dismissed such concerns, stating, "[W]e find the possible increase in energy shortage prices up to $3,700/MWh to be reasonable, because it permits energy prices during shortages to reflect the opportunity costs of foregone operating reserve profits."

Under PJM's approved filing, PJM will increase its energy market offer cap from $1,000/MWh to $2,000/MWh for cost-justified offers; cap market-based offers at $2,000/MWh only when the corresponding cost-based offer is above $1,000/MWh; and allow market sellers of generation resources with demonstrated costs above $2,000/MWh to recover those costs through make-whole payments.

Offers will be limited to $2,000/MWh for the purposes of setting Locational Marginal Prices (LMP).

ER16-76