PJM Interconnection real-time, load-weighted average power prices increased 68.1% in the first nine months of 2021, driven mostly by natural gas price increases. nd while the energy market was competitive, a host of market design issues remain on the grid operator's plate.
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The real-time, load-weighted average LMP increased from $21.22/MWh over the first three quarters of 2020 to $35.68/MWh in the corresponding period in 2021, according to the Quarterly State of the Market Report for PJM released Nov. 11 and prepared by Monitoring Analytics, the grid operator's independent market monitor.
Of the $14.46/MWh price increase, 91.5% was a direct result of higher fuel costs, particularly higher natural gas prices, while the real-time, average hourly load in the first nine months of 2021 increased by 4.2% from the first nine months of 2020, rising from 85,886 MWh to 89,515 MWh, the IMM said.
2020 gas prices were influenced by coronavirus pandemic impacts that lowered power demand. Lower gas prices made coal-fired power less competitive, but that dynamic shifted in 2021 as gas prices increased, according to the report.
Coal-fired generation increased 30.9% and gas-fired generation decreased 6.4% in the first nine months of 2021 compared to the first nine months of 2020, with the changes in relative fuel prices slowing but not changing the long-term declining share of coal and the increasing share of gas, the IMM said.
The IMM said that PJM's strong reliance on gas for generating power highlights the importance of ensuring that PJM has "current, detailed and complete information on the gas supply arrangements of all generators and that PJM consider rules requiring capacity resources to have firm fuel supplies."
Additionally, it is "essential" that the Federal Energy Regulatory Commission consider and address the implications of the "inconsistencies between the gas pipeline business model and the power producer business model" along with the issue of market power in the gas commodity market under extreme weather conditions, the market monitor said.
PJM has a stakeholder process underway to address this concern.
Market design issues
The IMM flagged two key changes to PJM's energy markets -- fast start pricing and Operating Reserve Demand Curve changes -- that that could "significantly increase energy market prices in ways not consistent with competitive markets."
In response to FERC concerns, PJM sought to better align pricing and dispatch intervals by assigning prices to the same interval for which dispatch instructions are intended, or roughly 10 minutes in the future. The fast start pricing changes went into effect on Sept. 1.
According to the IMM, in September 2021, fast start pricing was applied to 6.5% of marginal resources in the real-time market and increased overall real-time energy market prices by 4.0%, which is a "significant" power price increase given that it does not result from any change to the underlying market supply and demand fundamentals.
Additionally, an extended downward sloping operating reserve demand curve, or ORDC, a form of administrative pricing that "will affect prices in a majority of hours" will go into effect on Oct. 1, 2022, the IMM said.
The rule changes are intended to strengthen scarcity pricing signals to incentive power generators to provide power during emergencies, but under the extended ORDC, PJM energy market prices can exceed $14,000/MWh, which will impose administrative pricing that exceeds competitive levels, according to the market monitor.
PJM and its stakeholders are looking to create a "circuit breaker" mechanism to limit extended periods of extremely high prices, but the IMM cautioned that initiative would not resolve "market inefficiencies" inherent in the extended ORDC.
The rise of renewable energy and intermittent power resources with lower capacity factors than thermal resources create additional market concerns, and the IMM recommended PJM formulate incentives for building hybrid resources that pair renewables with storage systems.
Although a small share of PJM's existing generation capacity, renewables dominate the interconnection queue. However, of the 169,842.7 MW of renewable projects in the queue, only 22,645.4 MW, or 13.3%, are expected to go in service based on historical completion rates and be available to supply energy, the IMM said.
Of those 22,645.4 MW, only 9,100.5 MW, or 5.4%, are expected to be capacity resources, based on the average derate factors for wind and solar power. As such, it is critical that PJM's Effective Load Carrying Capability approach accurately values capacity, the monitor said.