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PJM calls for market reforms as generation payments rise during recent chill

A cold snap in the PJM Interconnection in late December 2017 and early January 2018 was not as severe as during the 2014 "polar vortex" event, but power price spikes that occurred still show the need for market reforms, a PJM report said.

The 13-state power grid, which extends from northern Illinois to New Jersey, performed well during the below-normal temperatures, PJM staff said in the report "PJM Cold Snap Performance Dec. 28, 2017 to Jan. 7, 2018." Over the 11 days from Dec. 28 to Jan. 7, the grid experienced its sixth-highest winter peak, at 137,522 MW. The all-time winter peak of 143,338 MW came Feb. 20, 2015.

Though the grid had enough supply to cover demand, PJM noted a significant increase in extra charges called "uplift" compared to prior winters. During the cold snap, some peak days saw uplift charges averaging about $4.3 million per day compared to earlier occurrences that averaged about $389,000 per day. Total uplift charges over the period were more than $70 million, more than triple the amount paid during comparable time periods in 2015 to 2016 and 2016 to 2017, PJM said in the report.

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PJM President and CEO Andy Ott said in a statement, "We must enhance market pricing so that prices accurately reflect the cost of serving load including the actions taken by dispatchers."

The uplift payments reflect the need to pay generators extra when more resources are needed to keep the grid reliable under constrained conditions. The amount of uplift, or "make whole," payments suggest inefficiencies in market design and a mismatch between the prices that that market pays generators through clearing prices and the prices needed by generators to cover their operating costs.

"The need for out-of-market uplift payments is a symptom that pricing for reserves and energy is incorrect," Ott said.

Ott's remarks came as PJM staff in a Nov. 15, 2017, paper proposed changes to its energy markets to allow inflexible units such as older steam units to set clearing prices in the energy markets. This maneuver essentially allows generators to get paid more through market revenues and thus rely less on extra uplift payments, according to the paper, "Proposed Enhancements to Energy Price Formation."

Forced outages

Overall, PJM saw a large reduction in forced outages in the recent cold snap compared to those during the polar vortex in 2014. On Jan. 7, there were 23,751 MW of forced outages, or 12.1% of total installed capacity, compared to 40,200 MW of forced outages, or 22% of total capacity, Jan. 7, 2014.

One reason for the lower percentage of forced outages is that in the recent cold spell, overall winter conditions were milder than during the 2014 polar vortex, when three consecutive days of below-zero temperatures occurred. Also, the recent cold snap occurred in part over a holiday period, when demand is generally lower, PJM said in the report.

From Jan. 3-7, the primary causes of the forced outages were natural gas plant issues or gas supply issues, but coal issues such as transportation and freezing equipment were another sizable contributor. A smaller share of the forced outages over the five days came from oil, landfill gas and hydro generators. PJM uses "gas supply issue" to refer to a lack of natural gas supply for reasons such as limited pipeline capacity, transportation interruptions or limited availability of gas in the real-time markets.

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Capacity performance

PJM implemented stricter performance requirements called capacity performance, or CP, after the 2014 event to ensure generators perform when they are needed. The requirements use a pay-for-performance structure that penalizes generators that underperform and pays other units extra for overperforming. The capacity performance requirements kick in when PJM calls certain emergency conditions called "performance assessment hours," and though none were called upon during the recent cold snap, the preparations that resources have made, such as securing backup fuel, could support reliable operations.

Gas units that complied with capacity performance tended to show lower forced outage rates from Jan. 3-7 than those that did not. But the picture was different for coal and oil units. PJM staff said, "The operational data on outage performance for both coal and oil resources implies that there was no improvement for CP resources, and further analysis is required to confirm whether most CP resource investments have been focused on firming up supply versus plant equipment improvements."