Americas Energy CEO Series: Andrew Ott, PJM CEO

As US power markets evolve with changing fuel mixes and technology, properly valuing power generation resources has become a priority for grid operators, PJM Interconnection President and CEO Andrew Ott said.

The head of the world's largest power market discussed PJM's power price formation initiatives, grid resilience and the prospect of more closely aligning gas and power infrastructure in a recent interview with S&P Global Platts.

Ott, a 20-year PJM veteran, became CEO in 2015 and also serves as a PJM board member. Internationally recognized as an electricity market design expert, he was responsible for the design and implementation of PJM's wholesale electricity markets.

Ott also serves on the board of the Association of Edison Illuminating Companies and previously served as a board member for the professional group Association of Power Exchanges.

PJM is a regional transmission organization coordinating the movement of wholesale electricity used by more than 65 million people in all or parts of 13 states and the District of Columbia.

Over the past few years the grid operator has focused on improving the efficiency of its capacity market, which ensures an adequate supply of power is available to meet expected future energy demand, and is now setting its sights on energy market design improvements, Ott said.

"We had spent a lot of time in the past three or four years on capacity markets, but we really hadn't done any full review of our energy market formation," he said. The issue has been discussed at the Federal Energy Regulatory Commission but has not yet moved forward. PJM was waiting to see what FERC would do regarding energy market price formation but is now moving forward as other jurisdictions, including New England, New York and the Midcontinent System Operator, have done. "PJM needs to catch up," Ott said.

The DOE released a power grid resilience study in August that focused on ensuring electricity prices properly reflect the reliability value of all resources and that the US power grid remains reliable. Coincidentally, those were the two "strategic initiatives" PJM was discussing at the end of last year into 2017, he said.

"We need to look at the energy price and make sure that it properly reflects the value of all resources that we 're depending on to serve customers. We 're not targeting it at nuclear plants, coal plants or gas plants," he explained. "We 're saying if a generator is running... the price needs to reflect the fact that it's online and needs to reflect its flexibility attributes," which are a "big deal" if we are going to build a more robust and resilient grid.

PJM's rules say in order for a generator to set the marginal price it has to be flexible, meaning it can quickly startup or ramp up or down if already running.

There are a significant number of generators that run but do not participate in setting the price. "That's a problem," Ott said, because those units need to run every day and the price needs to reflect that. Inflexible units include nuclear plants, large coal plants and some gas -fired steam units.

"The goal of energy price formation is to accurately value the attributes of generators that we use on a frequent basis," he said. If there is a phenomenon where the energy price is systematically understated by not properly valuing the flexibility of other resources, then nuclear plants are "casualties by default" because the price of electricity "that they produce a lot of" is understated.

"Our purpose is to make sure the prices are accurate and reflect what we need in services from generators," Ott said. This will be one of PJM's major 2018 initiatives and he expects an action plan to emerge in the first half of the year.

The issue of fuel security for power generation is likely to heat up next year, Ott predicted. There is a concern among federal officials about potential vulnerabilities to fuel supply for power generation.

Ott's discussions with gas industry executives have also pointed toward a need for greaterpower generation fuel security and infrastructure coordination.

While significant progress has been made on sharing information between the two industries, more can be done, he said.

For example, if a gas pipeline experiences an operational flow issue or a physical disruption, "there are still some gaps" in quickly getting information about the supply impact to plant operators connected to that pipeline. "Having much more rapid coordination within the day on the operational status is important," he said.

Specifically, there needs to be a clear system for determining which generators get gas when there is a pipeline disruption that results in a force majeure situation where commercial supply contracts are suspended.

"That is something we don't have a lot of visibility into on the power side," Ott said. PJM needs to know the fuel supply status during these events very quickly so it can adapt its operations. "That simply doesn't exist and is the absolute most important thing for us to know and understand."