PJM Forecast Shows Proposal To Juice Energy Market Price Formation, Scarcity Pricing Would Add Up To $1.4 Billion In Costs Annually To LSEs, Retail Suppliers

PJM Interconnection has released a proposal meant to improve wholesale energy market "price formation" and also revise the triggers for scarcity pricing, which would make scarcity pricing more frequent

In short, PJM in a paper (click here) recommends that the locational marginal pricing regime be modified to allow inflexible units scheduled by PJM to set price under certain circumstances.

"While the energy cost, net of capacity credit offset, will likely increase, more accurate pricing will support efficient investment with diverse resource attributes meeting growing operational needs for flexibility in the long term," PJM said of its proposal

Additionally, PJM proposed shortage pricing changes.

Among these is implementing a real-time, 30-minute operating reserve product to "enhance" shortage pricing by sending price signals to incent response prior to a shortage of 10-minute reserves, thereby mitigating severe shortages of 10-minute reserves

PJM said that, "The current ORDCs do not meaningfully value reserves in excess of the normal operating requirement. While these curves do contain a smaller second step at $300/MWh, this step was implemented as a method to protect against price swings from transient shortages rather than a focused attempt to value reserves on the system."

Most notably, PJM said, "Similar to the variable resource requirement curve used in the capacity market, PJM believes that there is a reliability value to operating reserves even when they exceed the largest online contingency in real-time, and the value of those reserves should be articulated through the demand curve."

In other words, similar to the capacity market, where capacity is procured well in-excess of the mandated reserve margin under the guide that such extra margin provides benefits to load, PJM is for the ORDC proposing to mandate, and determine a value for, additional "insurance" beyond what is required to reliably operate the system

PJM further proposed modifying the shortage pricing mechanism by, "assigning a value to reserves consistent with their reliability benefit to the system."

"The current ORDCs have prices that are based on historic costs to provide these services rather than their reliability value. This results in relatively low prices for such services that are inconsistent with their importance to grid reliability," PJM said

The estimated net impact of the proposed changes is an expected increase in total energy and capacity market costs of between $440 million and $1.4 billion annually, or between 2 and 5 percent, compared to total simulated energy and capacity market costs of approximately $28 billion. This net impact is composed of an increase in energy market costs of approximately $2.7 billion, offset by a decrease in capacity market costs of between $1.2 billion and $2.2 billion. This decrease in capacity payments reflects only the direct impact of increased energy market revenues in the capacity market, and does not include the beneficial impacts of retaining additional resources due to enhanced energy market price formation.

Part of the forecast reduction in capacity market costs was from, "[e]stimated changes in resource offer behavior given the increase in energy market revenues."

PJM noted in its paper that, "It is more difficult to predict the timing of observing these supply offer impacts in the capacity market since it is reasonable to expect that suppliers may determine their capacity market offers on the basis of anticipated as opposed to historical energy market revenues."

PJM's analysis forecast an $80 million annual reduction in uplift payments, the impact of which is included in the aggregate forecast net costs listed above

In its paper, PJM states, "Given the low energy market prices currently being experienced, it is reasonable to expect that a significant quantity of resources on the system are or will shortly become at risk for retirement. Therefore, while PJM is currently clearing the RPM Base Residual Auctions with a reserve margin of around 24 percent, absent the proposed changes to energy market price formation, that margin can be expected to shrink significantly over the coming years."

"PJM believes that it is reasonable to assume that over time, this reserve margin could shrink to a value that approximates the minimum PJM installed reserve margin (IRM) of around 16.6 percent. If PJM’s proposed enhancements to energy market price formation are implemented, though, PJM believes that the correction represented by resource retirements will not be as significant as it would otherwise be without the proposed changes, and therefore PJM will continue to experience some level of surplus resources on the system that exceed the minimum required IRM," PJM said in the paper