PJM Interconnection Response to the 2016 State of the Market Report
The 2016 State of the Market Report1 issued by PJM’s Independent Market Monitor (IMM) provides an assessment of
market performance and recommendations aimed at enhancing PJM’s market design or market performance. The Market
Monitor performs an important role in providing an independent assessment of market performance and provides valuable
insights in its conclusions and recommendations. This report will provide to stakeholders PJM’s observations on the
market and evaluations of each substantive recommendation offered by the IMM.
In the 2016 State of the Market Report, the IMM concludes that the PJM markets work. The IMM concludes that the results
of the PJM Energy, Capacity, Regulation, Synchronized Reserve, Day-Ahead Scheduling Reserve and Financial
Transmission Right (FTR) markets were competitive. PJM agrees with the IMM and believes the observed market results
support these conclusions.
In this response, PJM begins with a comprehensive view of the state of the PJM electricity markets. This introductory
section highlights three topics: 1) setting the stage, 2) understanding price formation, and 3) key developments related to
price formation in 2016. Through its discussion of these topics, PJM documents evidence that the PJM competitive
electricity markets are delivering on their intended purpose, and highlights the critical importance of price formation,
particularly in the energy market, given the evolving nature of the system and the fuel mix of supply resources. The
document continues with critical events of 2016 and concludes the introductory section with a discussion of the ways in
which PJM believes the markets need to continue to evolve.
Price formation in the energy and reserve markets needs to evolve. Components of the current mechanism by which
energy prices are established require reevaluation, in particular the inability of inflexible resources to set locational
marginal prices. Additionally, a mechanism is necessary to further incent resource flexibility. Given how the system is
evolving, PJM needs to ensure that sufficient incentive exists for resources to provide flexibility to the grid and to establish
transparent prices that drive innovation to provide this service. Finally, the incorporation of public policy into wholesale
markets needs to be reexamined given recent and potential state actions to maintain specific resources in operation.
The remainder of this report provides PJM’s response to each of the IMM recommendations contained in the 2016 State of
the Market Report, paralleling the IMM’s report structure with respect to each subject area.