PJM's Energy Market Reform Could Drive Up Costs for Energy Users

Earlier this month, PJM announced that it will move ahead with efforts to invalidate its energy price formation market rules—a move that comes after more than a year of debate, but little action, over how traditional power generators should be compensated in the grid operator’s service territory.

Here’s How We Got to This Point

In November 2017, PJM released a whitepaper that proposed changes to its current energy and capacity market design. The whitepaper came out amid the backlash following the US Department of Energy’s (DOE) Notice of Proposed Rulemaking, which aimed to subsidize failing nuclear and coal generators. The Federal Energy Regulatory Commission (FERC) ultimately rejected the DOE’s proposal, which put the onus on PJM to determine how to adapt to a changing power generation mix.

FERC rejected PJM’s initial proposal, centered on capacity repricing, and declared that it was “unable to determine…the just and reasonable rate to replace the rate in PJM’s Tariff.” In early October, PJM submitted adjusted proposals that recommend changes to the capacity markets and which have yet to receive consensus approval.

In December 2018, PJM released an updated whitepaper that highlighted tentative changes to energy price formation, a fundamental point that was missing from the proposals submitted in October.

On February 13, PJM CEO Andrew Ott wrote to stakeholders to expect PJM to submit to FERC the following changes to how energy prices are calculated:

  • Consolidation of Tier 1 and Tier 2 Synchronized Reserve Products
  • Improved utilization of existing capability of locational reserve needs
  • Downward-sloping Operating Reserve Demand Curves (ORDCs) for all reserve products
  • Increased penalty factors to ORDCs to ensure utilization of all supply prior to a reserve shortage
  • Alignment of market-based reserve products in Day-Ahead and Real-Time Markets

These changes are intended to simplify the market, create more parity between the two tiers of reserve products, and more accurately compensate reserves for the reliability they offer.

Here’s What This Means for Energy Consumers

PJM’s proposals are missing one key change—offsetting adjustments to capacity prices. At the same time that PJM is prepared to move ahead with changes that could drive up energy prices, FERC is considering separate changes to PJM’s capacity market, which are intended to adjust their capacity auctions to account for state and federal subsidies, including the increasingly common state-level subsidies nuclear generation.

The proposed reforms represent significant changes to the way locational marginal prices (LMPs) are formed within the energy market. If FERC accepts these changes, energy users will see a corresponding increase to energy prices in many places across the PJM footprint. As proposals mount and are reviewed by FERC, any fundamental changes to market mechanisms, including energy price formation and capacity repricing, could lead to higher supplier pass-through costs in rates.

For more insight into the latest energy market developments, check out our market commentary for February
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Authored By George Todd

George is an Energy Analyst on Enel X North America's Intelligence and Analytics team specializing in the California, PJM, MISO, and Canadian electricity and natural gas markets.

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