By Rory D. Sweeney

PJM’s Board of Managers last week assured Pennsylvania legislators that the state has ample power generation for its needs and cautioned that fuel diversity will not ensure reliability.

The RTO was responding to a Feb. 9 letter from the state legislature’s Nuclear Energy Caucus with its own letter that seemed intended to assuage lawmakers’ fears about of blackouts and grid interruptions caused by inadequate resources. While the caucus’s message referred only to “baseload” units, it did voice support for several FERC and PJM initiatives that would benefit coal and nuclear plants.

“We are losing confidence in the ability of wholesale electric markets to ensure Pennsylvania maintains a diverse supply of baseload generation resources that ensure stable prices for our citizens and a reliable and resilient electrical grid,” the caucus wrote. “Pennsylvania’s baseload power plants continue to face the risk of premature retirement, and we do not see expeditious and sufficient action being taken by PJM or the Federal Energy Regulatory Commission to correct the market flaws at the heart of this problem — flaws that PJM itself acknowledges.”

PJM’s Independent Market Monitor noted last week in its 2017 State of the Market report that just 52% of coal-fired plants in the RTO recovered their avoidable costs in 2017. All of Pennsylvania’s five nuclear facilities made enough money to cover their costs last year, although none did in 2016, the report showed. Three Mile Island has seen negative revenues since 2015 and will continue to through 2020 unless market changes occur, while the other four will remain profitable through that year. (See IMM Report Says PJM Prices Sufficient.)

Adequacy Assured

PJM CEO Andy Ott penned the response to the caucus, which defended the RTO’s operations. Ott noted that Pennsylvania has built more than 12,000 MW of new generation over the 20 years that the RTO has managed its grid, calling it “a direct result of the investment signals sent by the PJM wholesale market.”

In the past six years, Pennsylvania has produced between 18 and 27% more energy than it needed, equating to about 6,500 MW of generation, or nearly two-thirds of the Keystone State’s nuclear fleet, Ott said.

While the caucus’s letter never mentioned costs, Ott remained focused on them, noting that “PJM markets have yielded reliability at the lowest cost for Pennsylvania.”

Diversity Necessary?

The caucus said its “concern has only been heightened by” the cold snap in January known as the “bomb cyclone.” (See PJM: Cold Snap Uplift Shows Need for Pricing Changes.)

“The dramatic increase in wholesale power prices during that period highlight the risk of overreliance on any single fuel source, a risk we believe PJM can and should avoid by swiftly enacting reforms,” the legislators wrote. “We believe that [PJM’s price-formation proposal] is an important first step in recognizing the benefits of fuel diversity within this market, and one that will help keep our grid — and power prices — stable for many years to come.”

Ott noted in his response that both the RTO and Pennsylvania are more fuel-diverse today than ever, but downplayed the significance of that fact.

“Fuel diversity, however, is not a metric with which PJM can measure reliability,” he said. “Instead, fuel security — the certainty of fuel availability for power production — affects reliability.”

Market Changes

The caucus supported PJM’s efforts to revise its energy price-formation methodology, calling the current process “a flaw in its market rules that unfairly disadvantages certain low-cost baseload generation resources” by not allowing them to set clearing prices. As a result, “market prices are artificially low and do not reflect the true cost of meeting customer demand.” It gave PJM “credit” for developing “a potential solution.”

The RTO’s solution is a controversial plan to allow large, inflexible units like coal and nuclear to set clearing prices. Currently, those plants’ bids are often among the highest of dispatched units, but only “flexible” units that can regulate their output in response to price signals are allowed to set prices. The inflexible units receive subsequent “uplift” payments to cover their operating costs. In PJM’s plan, those units would set price and the flexible units would be paid additional revenue to back down their output to avoid oversupply.

Critics of the plan argue that plants that don’t receive enough revenue in the competitive market should take that as a signal to shut down, not change the rules.

The caucus called the proposal “an important first step” but said it “will not fully correct the existing market flaws nor fully provide the compensation necessary to maintain baseload resources.” Still, a failure to implement the plan “will continue to inequitably exacerbate the financial challenges” those units face, the lawmakers said.

While Ott did not specifically address PJM’s price-formation proposal, he acknowledged “there is room for markets to more sharply define power grid requirements.”

“Efforts are underway to improve wholesale market price efficiency for all the resources that rely upon the wholesale market to compensate them for their services, and appropriately to provide transparent investment signals,” he assured the legislators.

Ott has previously said that the proposal would result in increased energy prices but decreased uplift and capacity prices. (See “PJM Pushes Price Formation Plan,” FERC, RTOs: Grid Performed Better in Jan. Cold Snap vs. 2014.)

Monitor’s Position

In his market report, Monitor Joe Bowring said the changes were not based on market flaws. Nearly 79% of the $24.7 million in uplift costs from day-ahead operating reserve differences were paid to coal units in 2017, but not because of market design issues, he said.

“That actually has to do with some very specific circumstances about coal units that have nothing to do with convexity and non-convexity and would not be affected by PJM’s price-formation proposal,” Bowring said.

FERC Resilience

The caucus also applauded PJM’s proposal as “entirely consistent” with the state legislature’s resolution in October calling on FERC to address the U.S. Department of Energy’s Notice of Proposed Rulemaking to financially support baseload generation. FERC denied the NOPR request in January but opened a docket to investigate concerns about the resilience of the nation’s energy grid.

The caucus endorsed the new docket as “an early step” and said it plans to press for any recommended changes that emerge from it.

“We are encouraged that FERC valued our concerns,” the caucus wrote. “You should know that as elected lawmakers ultimately responsible for our commonwealth’s energy policy, we will engage in the discussion and strongly support urgent implementation of critical findings.”