PJM, stakeholders to consider 'circuit breakers' in scarcity power pricing system

PJM Interconnection stakeholders June 23 approved a path forward to address the need for "circuit breakers" to limit market participant risk within PJM's scarcity pricing system through which locational marginal power prices could reach or exceed $12,050/MWh for extended periods.

In an extremely close sector-weighted vote, stakeholders approved a framing document, or issue charge, intended to improve the structure of PJM's reserve pricing rules, during a remotely held Markets & Reliability Committee Meeting.

Given the recent events in the Electric Reliability Council of Texas markets where extreme weather resulted in energy prices reaching about $9,000/MWh for over three days, PJM and certain stakeholders have questioned whether provisions should exist in PJM that cap energy and reserve market prices during a sustained operational emergency event.

"Extreme pricing for an extended or indefinite period during an emergency creates a cost which likely far exceeds the value of any contribution to preserving grid reliability," according to the issue charge that was sponsored by a mix of power generators including several public power cooperatives and large power consumers.

Under PJM's existing rules that use an Operating Reserve Demand Curve and Transmission Constraint Penalty Factors to form power prices, the energy component of those prices can reach $3,750/MWh.

But changes to the ORDC that have been approved by the Federal Energy Regulatory Commission and go into effect in May 2022 allow PJM power prices to reach or exceed $12,050/MWh in cases of extreme reserve shortages.

Rule change negotiations

Stakeholders were mostly in agreement about the need for "circuit breakers" to protect market participants from extended periods of extremely high prices, as indicated by the close 61 to 59 voting results on the issue charge.

There was little disagreement over the first key work activity that includes education about pricing rules during emergency actions, triggers for Performance Assessment Intervals and automatic use of maximum reserve penalty factors.

Similarly, there was agreement on the second key work activity which focuses on "circuit breakers" or other stop-loss approaches that could limit extreme pricing and discussion around whether PJM might need additional operation authorities to maintain grid reliability under such emergency conditions.

The main disagreement hinged on the scope of the third work activity, that among other things, seeks to "Explore, and address as appropriate, the additional market and credit risks of the ORDC changes in light of recent events in ERCOT, [Southwest Power Pool] SPP, and [Midcontinent Independent System Operator] MISO," according to the issue charge.

Specifically, some stakeholders were concerned that the third work activity was too open-ended and less well defined than the other focus areas. "There could be a significant amount of heartburn in terms of what else we are taking on," one stakeholder said.

As a result, a group of stakeholders proposed an alternate issue charge sponsored by the generation owner, transmission owner, and other supplier sectors that sought to narrow the effort's focus area.

In the alternate proposal, changes to PJM's ORDC, reserve product structure, and penalty factors were considered out of scope for stakeholder deliberation.

However, as part of the discussion, a stakeholder said that considering market and credit risks should be in scope as those elements are critical to calibrating when circuit breakers should be applied.

The stakeholder suggested looking back to prior polar vortex events when PJM was short on all reserve products for a period of four hours or more to see what the impact on market participants would be under the updated shortage pricing rules.

Under the approved issue charge, the first work activity will start in July, after that the second work activity is expected to take six months and "every effort will be made to expedite voting in an effort to receive FERC action on any potential rule changes before May 2022," the document said.

The third key work activity will start after the second has been "concluded or substantially concluded."