FERC greenlights PJM reserve market overhaul, eyes synergy with capacity reforms
The Federal Energy Regulatory Commission May 21 voted 3-1 in favor of a PJM Interconnection proposal designed to more accurately value reserves but criticized by some as yet another measure to boost the revenues of struggling fossil fuel-fired generators.
Commissioner Richard Glick, the sole Democrat on the four-member panel, dissented from the order. He argued during the agency’s open monthly meeting, held virtually May 21, that the reforms will “force consumers to pay scarcity pricing all the time,” costing them between $500 million and $2 billion annually without providing any additional benefit.
But Chairman Neil Chatterjee applauded the reforms.
“PJM showed that the current market mechanism systematically fails to enable PJM to acquire within the market the reserves it needs to operate its system reliably, and it fails to send appropriate price signals for efficient resource investment,” Chatterjee said. “The fact that PJM operators regularly must procure thousands of megawatts of reserves outside of the market construct is evidence of a market design that is unjust and unreasonable.”
PJM in March 2019 proposed energy price formation reforms in order to increase competition to supply reserves and subsequently decrease prices over time.
Under the proposal, PJM would use downward-sloping operating reserve demand curves, or ORDCs, to better reflect the reliability value of reserves. ORDCs are used to calculate the value of reserves as supply and demand tighten. The market design changes also consolidate Tier 1 and Tier 2 synchronized reserve products and align market-based reserve products PJM procures in the day-ahead and real-time markets.
“Together, these reforms will help ensure that market forces rather than out-of-market decisions drive the procurement of reserves in PJM,” Chatterjee said during the meeting.
After conducting a series of simulations to estimate the market impacts of the reserve market design changes, PJM found it could drive substantial increases in generators’ energy market revenues without having much of an impact on overall power prices.
Citing PJM’s filing, S&P Global Platts Analytics analyst Kieran Kemmerer said the proposal’s “round-the-clock impact” to wholesale energy prices probably will be below $1/MWh given “the large number of reserves available to the system and the ability for PJM to control for constraints with custom reserve sub-zones.”