Dive Brief:

• PJM Interconnection filed a proposal on Friday with the Federal Energy Regulatory Commission to update its energy market price formation rules, due to an impasse among its stakeholders.
• The grid operator offered reserve pricing rules based on concepts implemented by other regional transmission organizations and independent system operators. PJM proposed separate pricing calculations for the day-ahead and real-time markets to reflect the different opportunity costs of a resource in each market.
• A key question is how the new rules will treat different types of generation sources. "As the system becomes more dependent on renewable resources, the need for flexibility from all types of resources will increase due to the uncertainties involved in forecasting actual wind conditions and cloud cover on a given day," PJM said in a statement. "More effectively valuing this flexibility will allow for the ongoing seamless integration of these resources in the future," the statement continued.

Dive Insight:

The proposal would boost prices in the real-time and day-ahead energy markets by “more effectively valuing” the flexibility needed for resources on a grid with an increasing amount of renewables.

Facing significant disagreement among its stakeholders, this is the second filing to reform energy markets that PJM staff has made directly to federal regulators, without stakeholder consensus. The grid operator is also waiting on FERC action to approve their second proposal to replace capacity market rules, as various deadlines come up before the next auction that was previously delayed to August. Following PJM’s request, FERC had invalidated the original capacity market rules in 2018.

The grid operator's governing board directed its staff to invalidate and update reserve market rules in February, after continued frustrations over a lack of consensus stakeholders, after PJM participants had debated proposals to implement reserve market reforms for more than a year.

“Clearly the PJM stakeholder process is not working very well right now,” Tom Rutigliano, senior advocate of the Sustainable FERC Project within the Natural Resources Defense Council, told Utility Dive. “My opinion is that they haven’t been taking the diversity of stakeholder positions and interests seriously enough.”

Stakeholders have admitted to some issues with cooperation and arriving at consensus in a timely manner and “they’re working on that through their governance process,” PJM CEO Andy Ott said mid-March, on Utility Dive’s Electric Power Station podcast. “We’re trying to create a market design that is sustainable into the future,” he said, regarding why PJM staff moved forward with the reserve market reform proposal.

The filing on Friday is similar to the plan that PJM previewed on March 14, according to Rutigliano.

“Longer term, we think this is moving in the right direction and it may work better for the heterogeneous grid of the future,” Rutigliano told Utility Dive, noting that the plan is “strategically right, but maybe not implemented the way that we think is best,” due to the potential to increase costs for consumers.

"We have the 30 minute reserve, the 10 minute reserve, these high quality reserve products. We depend on them, we schedule them, and the price essentially, even during the heavy winter load, is close to zero," Ott said. "As soon as we're 2 MW or 3 MW over the narrow view of what we need, the price drops to zero because we don't have a proper reserve market."

To address that, PJM’s reserve pricing proposal would ask FERC to institute a sloped demand curve that will allow prices to respond earlier as the system utilizes generation reserves.

"We need to price the synchronized reserve, the 30 minute reserve, consistently in both the real time and day-ahead markets," he said. "We need a sloped operating reserve demand curve [ORDC] so we don't see that price drop-off, so those are the essential elements of the proposal."

“ORDCs and scarcity pricing are the right thing to do in order to attract and retain the flexible resources we need,” Rob Gramlich, president of Grid Strategies LLC and wind energy consultant, told Utility Dive. “I think the challenge will be for PJM to justify the exact shape of this curve. It would be nice if it were tied to value of loss load or some accepted economic concept, but that doesn't seem to be the case.”

PJM is seeking federal regulatory action by December 15 in order to implement the proposed revisions by June 1, 2020.