The Federal Energy Regulatory Commission May 21 voted 3-1 in favor of a PJM Interconnection proposal designed to more accurately value reserves but criticized by some as yet another measure to boost the revenues of struggling fossil fuel-fired generators.
Commissioner Richard Glick, the sole Democrat on the four-member panel, dissented from the order. He argued during the agency's open monthly meeting, held virtually May 21, that the reforms will "force consumers to pay scarcity pricing all the time," costing them between $500 million and $2 billion annually without providing any additional benefit.
But Chairman Neil Chatterjee applauded the reforms.
"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. "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."
PJM in March 2019 proposed energy price formation reforms in order to increase competition to supply reserves and subsequently decrease prices over time.
Under the proposal, PJM would use downward-sloping operating reserve demand curves, or ORDCs, to better reflect the reliability value of reserves. ORDCs are used to calculate the value of reserves as supply and demand tighten. The market design changes also consolidate Tier 1 and Tier 2 synchronized reserve products and align market-based reserve products PJM procures in the day-ahead and real-time markets.
"Together, these reforms will help ensure that market forces rather than out-of-market decisions drive the procurement of reserves in PJM," Chatterjee said during the meeting.
After conducting a series of simulations to estimate the market impacts of the reserve market design changes, PJM found it could drive substantial increases in generators' energy market revenues without having much of an impact on overall power prices.
Citing PJM's filing, S&P Global Platts Analytics analyst Kieran Kemmerer said the proposal's "round-the-clock impact" to wholesale energy prices probably will be below $1/MWh given "the large number of reserves available to the system and the ability for PJM to control for constraints with custom reserve sub-zones."
Chatterjee acknowledged the significant effects the reforms are expected to have on the volume of reserves procured and on the energy and ancillary services revenues earned by resources in PJM. He stressed the need to consider how the new reforms fit together with the capacity market, specifically noting the energy and ancillary services offset. This is a variable PJM uses to help determine the amount and cost of capacity that must be procured in the region.
The order directs PJM to adopt a forward-looking methodology for calculating that offset and gives PJM 45 days to submit a compliance filing.
"Recognizing the interplay between these reforms and the pending capacity market reforms, we've asked PJM to propose an implementation schedule that harmonizes the reforms while minimizing auction delays," Chatterjee said.
Chatterjee told reporters during a press call after the meeting that the energy and ancillary services markets were designed to work with the capacity market to ensure that PJM has the resources necessary to meet demand.
The chairman defended the need for the reserve market reforms while PJM contends with sweeping changes to its capacity market ordered in December 2019. "Because if resources receive more of their revenues from the energy and ancillary services markets, then resources can and should be able to make lower offers in the capacity market," Chatterjee said.
Glick during the meeting challenged the chairman's assertion that the order was a turn toward reliance on market forces. "How is it market forces when we're administratively drawing up some curve that makes no sense and the market wouldn't support? We're doing it obviously to raise prices," he said.
"PJM and others continue to treat low prices, due in large part to a significant amount of excess generating capacity, as a matter that requires market tweaks designed to raise prices," Glick said. "Instead of addressing the true cause of the problem, which is excess capacity, this commission continues to approve proposals that raise prices," further exacerbating the problem.
Chatterjee, responding to reporter questions, countered that while PJM has healthy reserve margins at the moment, the commission's actions are about the long-term functioning of PJM's markets. He added that he fundamentally disagreed with arguments that the latest reforms unnecessarily inflate costs for customers.
The order was not immediately available May 21. (FERC docket EL19-58)
Jasmin Melvin is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.