New York — PJM Interconnection's markets face significant challenges, according to its independent monitor, which found that only the energy market's design is currently operating effectively. The market monitor found the capacity market is not competitive, and the remaining market designs are either mixed or flawed.
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"The PJM markets work, even if not perfectly," Monitoring Analytics, the grid operator's independent market monitor, said in its Quarterly State of the Market Report for PJM: January through September.
While the energy market was competitive for the first nine months of the year, the results of the base capacity auction for 2021/2022 were not competitive and the "related issues need to be addressed," the IMM said.
The US Federal Energy Regulatory Commission issued an order June 29 that found PJM's existing tariff governing its capacity market is unjust and unreasonable, which set off a major proceeding (EL18-178) to adjust the rules. The order said PJM's capacity pricing model had become "untenably threatened by out-of-market payments provided or required by certain states."
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In the market report, the IMM questioned whether the market-based regulatory construct can coexist with efforts to boost the role of renewable energy resources through nonmarket revenue. The pressure on PJM's capacity market has been increasing for several years as states have "created significant nonmarket payments for renewable energy" generally through renewable portfolio standards, the IMM said.
Trying to balance resources receiving these nonmarket payments with unsubsidized resources within PJM's competitive capacity auction bidding process has added to a situation where the capacity market has "not been permitted to reveal the underlying supply and demand fundamentals in prices," the market watchdog said. It is "more critical than ever to get capacity market prices correct."
Based on metrics that evaluate market structure, participant behavior and market performance, the capacity market was deemed uncompetitive and the market design was "mixed."
A mixed market design has significant issues that constrain the potential for competitive behavior to result in competitive outcomes and lacks adequate rules to mitigate market power or incent competitive behavior, according to the monitor's definition. A flawed market design produces inefficient outcomes which cannot be corrected by competitive behavior.
The day-ahead scheduling reserve market and Tier 2 synchronized reserve market exhibited mixed market designs, while the regulation market and financial transmission rights auction market were found to have flawed market designs, according to the report. "We have been saying for some time that market changes are needed to support the evolution in our industry," PJM spokeswoman Susan Buehler said in an email Friday.
"Our market has functioned well over the past two decades but it has been outpaced by the fast changing events under which PJM had to react in a variety of ways," Buehler said.
With regard to the capacity market, PJM president Andy Ott during the recently held Organization of PJM States meeting in Chicago said, "I understand the concerns that the market should consider state policy interests and I believe our proposal at FERC consists of a workable path forward."
A decision from FERC is expected in early 2019 in order to keep the capacity auction on schedule for August.
The level of potential power plant retirements does not imply a reliability issue in PJM and does not imply a fuel security issue, the IMM said.
Using historical data, nine of PJM's 18 nuclear plants with a total capacity of 14,027 MW did not recover their avoidable costs in two of the last three years. Based on forward energy prices and the known forward prices for capacity, all but three nuclear power plants would cover their annual avoidable costs on average over the next four years (2018 through 2021), the report found.
The three plants -- Davis Besse, Perry, and Three Mile Island -- with a combined 2,939 MW of capacity have all requested deactivation. "There are some nuclear power plants in PJM that are not economic at expected levels of energy and capacity market clearing prices" and there are some coal plants that are not economic, the IMM said. "The decisions on how to proceed belong to the owners of those plants."
Many power plants have retired in PJM since the introduction of markets, and many have been built, the monitor said.
PJM had excess reserves of more than 9,000 MW on June 1, 2018, and will have excess reserves of almost 16,000 MW on June 1, 2019, based on current positions, the report said. There are also nearly 22,000 MW of new generation in the interconnection queue expected to go into service.
The load-weighted, average real-time locational marginal price was 29.9% higher in the first nine months of 2018 than in the first nine months of 2017, at $39.43/MWh versus $30.36/per MWh, the report said.
-- Jared Anderson, firstname.lastname@example.org
-- Edited by Gail Roberts, email@example.com