PJM Files Price Formation Reforms for Proper Valuation of Energy Reserves

PJM Interconnection LLC on March 29 filed a proposal with the Federal Energy Regulatory Commission to revise its energy and reserve market rules to properly value the energy reserves that support grid reliability by providing the flexibility needed to accommodate the evolving resource mix. The grid operator said that the growing variability of power demand driven by the penetration of home solar and other distributed resources has raised the value of reserves, which are needed when uncertainties in weather and forecasts call for addition of resources to meet demand.

The grid operator underscored the mismatch between price and value of reserves during stressed periods, particularly synchronized reserves that respond quickly by supplying demand within 10 minutes. PJM pointed to the situation on Jan. 31, the peak day of winter, when “synchronized reserve market prices were at zero for 19 of 24 hours,” indicating that they have little or no value.

The reforms are intended to “ensure that prices in the reserve market reflect the value of operator actions that can then flow through to the energy market.” Accurately valuing these actions is expected to provide opportunities for electricity customers to hedge the costs. The reforms would also provide financial incentive to spur investment in in new capacity to supply the reserves, according to PJM.

PJM projects that full implementation of state renewable portfolio standards will require an additional 25 gigawatts of wind and 12 gigawatts of solar to supply energy in its footprint by 2034. In addition to their central role in supporting reliability, reserves are valued for their ability to provide the backup flexibility to keep the grid prepared for the continued integration of alternative energy sources. Reserves are resources that are not scheduled to serve demand during the target period, but are capable of providing energy on fairly short notice if needed, according to PJM.

PJM’s board of managers on Feb. 13 directed PJM staff to submit a revised version of its energy price formation proposal for FERC approval after market participants failed to reach an agreement on a compromise proposal to update the energy reserve pricing rules. The board asked PJM to file a plan in line with that of the staff, with certain changes to reflect stakeholder discussions and feedback.

PJM proposed to update price formation rules in November 2017 by allowing all types of generators, both flexible and inflexible, to set the clearing price to accurately reflect the resources required to serve demand to limit out-of-market payments. The plan has been under discussion since then, and last December, the board directed stakeholders to conclude deliberations by Jan. 31. PJM states criticized the “unnecessarily rushed timeline,” underscoring that the staff should be able to generate analyses that will inform stakeholders regarding the impacts of the revisions on market sellers and consumers.

PJM is seeking an order by Dec. 15, in order to implement the revisions by June 1, 2020.