PJM to propose updated maximum energy, reserve product price caps to FERC

Ahead of a Feb. 22 federal regulatory compliance filing, PJM Interconnection and its stakeholders evaluated price-capping options that will increase maximum energy and reserve product prices, during a Feb. 16 task force meeting.

Following May and November 2020 decisions approving PJM's proposed reserve market changes, the Federal Energy Regulatory Commission decided on Dec. 22, 2021, to no longer support some of those provisions after the case was voluntarily remanded from the DC Circuit Court of Appeals (EL19-58, ER19-1486).

The order on remand required PJM to maintain the current operating reserve demand curves but did not address price capping for energy and reserve products under shortage pricing conditions when power supplies tighten.

PJM asked FERC on Jan. 18, 2022, for clarification on price capping before making the compliance filing due Feb. 22.

FERC clarified the remand order did not remove the price caps and indicated that PJM can propose revisions to the existing reserve price caps to reflect the addition of a new 30-minute reserve product, according to a PJM presentation given during a remotely held Energy Price Formation Senior Task Force meeting.

Transmission constraint penalty factor changes applicable to the ORDCs will result in changes to the maximum energy and reserve clearing prices in the "unlikely scenario of simultaneous shortage of all three reserve products in all locations," PJM said.

Raising the caps allows transmission constraint penalty factors to impact locational marginal power prices.

PJM staff said the grid operator is leaning toward using the existing penalty factor, adding the 30-minute reserve product, and recognizing the increasing value of the reserve products as shortage conditions increase.

The pricing that results from the penalty structure in that methodology more accurately reflects the cost of providing additional megawatts under shortage conditions, PJM said.

'Circuit breaker' considerations

PJM had previously proposed allowing maximum clearing prices to increase to higher levels during shortage conditions, with energy prices potentially rising to $12,000/MWh. PJM stakeholders were concerned that allowing energy prices to increase that much for extended periods of time would be problematic because costs for certain market participants could spiral out of control as they did during Winter Storm Uri in Texas.

As a result, stakeholders had been working on a "circuit breaker" market structure that would prevent such extreme outcomes.

However, FERC's order on remand effectively prevented clearing prices from rising that high and thus reduced the urgency of implementing a circuit breaker.

"The December 22, 2021, Order on Voluntary Remand reduced the maximum energy price to which the market is exposed from what members anticipated at the time the circuit breaker discussions began," according to a separate PJM presentation.

The $12,000/MWh maximum energy clearing price was originally expected to go into effect on Oct. 1, 2022, but with that now off the table, PJM asked stakeholders to reevaluate the timing and value of implementing a circuit breaker design.

Even with a lower maximum energy clearing price, however, under certain scenarios like a 14-hour shortage event, the market impacts could still be severe, PJM said.

The step-change for maximum energy prices in October is not what it was, so PJM staff asked if stakeholders still want to push for an Oct. 1 circuit breaker implementation date.

One stakeholder said that preparing a filing, voting on it within the PJM stakeholder process and getting it implemented by that date appears aggressive and another said given the changes there is nothing "magical" about Oct 1.

It appeared PJM and stakeholders agreed that discussing a circuit breaker remains worthwhile, but less urgent. The topic will be discussed at upcoming task force meetings.