Dive Brief:

• The Federal Energy Regulatory Commission (FERC) on Thursday voted to overhaul the PJM Interconnection's reserve market, in a move that the grid operator and market monitor have estimated could cost consumers between $500 million and $2 billion annually.
• The order adopts PJM's proposal to consolidate tier one and tier two reserve products, and revise the height and shape of PJM operating reserves demand curves, among other things. "These reforms will help ensure that market forces, rather than out of market decisions, drive the procurement of reserves in PJM,” FERC Chair Neil Chatterjee said during Thursday's virtual meeting.
• Commissioner Richard Glick, the sole dissenter on the order, decried the move as needlessly costly. "Instead of addressing the true cause of the problem, which is excess capacity, this commission continues to approve proposals that raise prices,” he said.

Dive Insight:

Operating reserves are the cushion of excess power grid operators keep on the system in case a generator has a sudden outage or there's a spike in demand. PJM then pays resources within its demand curve based on how much capacity it is projected to need. 

The grid operator was having trouble paying those resources enough to successfully obtain and deploy reserves under current market rules, it said in its initial proposal to FERC.

"PJM showed that the current market mechanism systematically fails to enable PJM to acquire within the market the reserves it needs to operate its system reliably, and it fails to send appropriate price signals for efficient resource investment,” Chatterjee said during the meeting. "The fact that PJM operators regularly must procure thousands of megawatts of reserves outside of the market construct is evidence of a market design that is unjust and unreasonable.”

FERC's approval Thursday raises the price cap to $2,000/MWh for each project, changes the demand curve to downward sloping and requires a forward-looking methodology for generator payments, something environmental groups supported.

"To put that another way: PJM will buy more reserves, and will pay more for each MW of reserves. In exchange, all else being equal, capacity prices will be cut," Peter Cavan, who works on distributed energy policy at electric services company Centrica, told Utility Dive in an email.

Previously, PJM's energy and ancillary service (E&AS) revenue offset was based on historic prices, Casey Roberts, staff attorney with the Sierra Club's environmental law program told Utility Dive.​ 

"They would look back three years at what E&AS revenues generators earned, and then subtract that from there," she said. "And so what a number of us said in protests was, 'Well, this is going to be really unfair, because you're going to have a demand curve that's deciding what prices generators get paid that's based on this backward looking methodology, reflecting lower historic prices.'" 

Despite one victory for environmental groups, Glick and others argue that the grid operator's plan does not address the root of the problem — that PJM has too much capacity on its system which is why its prices are so low, and increasing the cost it would pay generators does not address its fundamental overcapacity issue. A March report found PJM consumers pay up to $4.4 billion annually for unneeded capacity.

"We need to consider on a global basis how we look at PJM's markets, instead of continuing to react to piecemeal proposals that are unsustainable and threaten to break apart PJM itself,” said Glick. "And we are starting to see evidence that the future of PJM as we know it is at stake because of it, no matter how many times the chairman denies it.”

Chatterjee acknowledged the issue of overcapacity in comments to reporters, but said FERC's move was fundamentally about the long-term health of the market.

"Look, currently, there are healthy reserves margins in PJM. But our actions on the capacity market and our actions today are about the long-term functioning of PJM markets,” he said. 

"I fundamentally disagree with arguments that our action today unnecessarily inflates cost for customers ... it is easy for a commissioner to dissent on proposals and make general calls for reforms. It's not so easy to do the hard work of considering the proposals in front of us and adopting solutions.”

The grid operator and its independent market monitor (IMM) have both found the proposal would increase prices to consumers — Monitoring Analytics estimates ranged from $1.7 billion to $2 billion in consumer costs, while PJM estimated $500 million. The IMM opposed the proposal, and PJM was unable to comment by time of publication because FERC's order had not yet been released.

"I think Glick is right that the Commission needs to be taking a much more comprehensive and thorough assessment of whether PJM is working for consumers. But I don't know that this case is going to be the straw that broke the camel's back,” said Sierra Club's Roberts. "But we'll see."