PJM Files Pricing "Reforms" For Reserve Market To Address Price Formation

PJM filed at FERC several changes to the reserve market to address price formation

Among other things, PJM said in a news release that, "The pricing reform would also provide financial incentive to attract investment in new capacity that can provide these reserves."

PJM proposed to:

• consolidate the Tier 1 and Tier 2 synchronized reserve products into one product, called "Synchronized Reserve," with uniform commitment, compensation, and performance obligations to meet all Synchronized Reserve needs

• revise the current Operating Reserve Demand Curve (ORDC) by:

--- raising the Reserve Penalty Factor to $2,000/MWh

--- changing the ORDC curve shape to a downward-sloping curve, based on a systematic, probabilistic quantification of the same categories of load and supply uncertainties that PJM operators are currently trying to address when they bias dispatch schedules or take other out-of-market actions to guard against PJM falling short of its minimum reserve requirements (MRR)

• align the day-ahead and real-time reserve markets to ensure that the reserves needed for real-time operation are recognized on a forward basis during the scheduling processes for the next operating day.

Regarding the Reserve Penalty Factor, PJM said that, "The current $850/MWh Reserve Penalty Factor ... prevents the reserve market clearing price from reflecting the incremental costs of resources needed to meet reserve requirements in shortage or near-shortage conditions."

Under the current rules, Reserve Penalty Factors apply separately to satisfaction of each MRR, and recognize zonal reserve shortages that arise from constraints on relying on reserves in one part of the system to meet reserve shortages in other parts of the system. Moreover, because (to satisfy reliability standards) reserves must be maintained for each minimum requirement and for each constrained location, under the current rules Reserve Penalty Factors triggered by each requirement and locational shortage are additive, albeit capped. PJM’s proposal retains the additivity approach, and conforms it to reflect the reserve products proposed in its FERC filing.

"However, PJM proposes to remove the cap as it arbitrarily suppresses the price for reserves when the cascading of shortages on the system indicate such reserves are most needed. While this implies that prices could rise as high as $12,000/MWh, that maximal pricing result: (i) can occur only from the simultaneous occurrence and confluence of multiple product and locational shortages; (ii) is necessary to recognize the independent value of avoiding each such shortage; (iii) implies very extreme conditions that demand immediate supplier response; (iv) likely approximates consensus estimates of the value to load of avoiding curtailment; and (v) logically applies the current approved approach to the reserve products and Reserve Penalty Factors proposed in this filing," PJM said in its filing

"PJM notes this could rise to $14,000/MWh if PJM models a sub-zone for the 30-minute requirement, but as a default PJM intends to only model the 30-minute reserve requirement for the RTO-wide Reserve Zone," PJM said in its filing