By Rory D. Sweeney

WILMINGTON, Del. — PJM stakeholders last week endorsed a new rule that is likely to fuel consternation among owners of energy storage participating in the RTO’s regulation market. (See “Regulation,” PJM Operating Committee Briefs: Oct. 9, 2018.)

The rule approved by the Markets and Reliability and Members committees would effectively lower the amount of storage that can clear in the market’s hourly auctions. PJM proposed the change along with a problem statement and issue charge focused on the issue.

PJM’s performance-based regulation market, which went into effect in October 2012, splits the dispatch signal in two: RegA for slower-moving, longer-running units; and RegD for faster-responding units like batteries that operate for shorter periods. It also developed a “benefits factor” to compare the value of the two types of resources through a ratio.

In December 2015, the benefits factor was floored at 1, meaning that a megawatt of RegD would never be valued less than a megawatt of RegA. Staff then modified the regulation signal in January 2017 and removed the benefits factor floor entirely in August 2018 “based on operational analysis.” A proposal developed by PJM and its Independent Market Monitor that was endorsed by stakeholders in June 2017 would have implemented use of a “marginal rate of technical substitution” instead of the benefits factor, but FERC rejected the filing as unreasonably discriminatory against storage resources. (See FERC Rejects PJM Regulation Plan, Calls Tech Conference.)

With the benefits factor allowed to fall to zero, more megawatts of RegD would need to be substituted for each megawatt of RegA, but the resulting values create unintended price spikes. Staff explained that where the benefits factor fits into the pricing formulas, a situation can develop where “minimally effective resources” clear the hour-ahead auction with a $0/MWh offer price. When they operate, however, their adjusted lost opportunity cost (LOC), which is based on the current LMP when accounts are settled every five minutes, can “drastically increase” the clearing price, PJM’s Lisa Morelli said. Staff have seen the math result in clearing prices as high as $10,000/MWh, and there were 80 five-minute intervals between May and August when the clearing price rose above $500, she said.

PJM’s solution would reinstate a benefits factor floor of 0.1 so that the ratio would be limited to 10 MW of RegD to provide 1 MW of RegA and prevent extreme LOC escalations. Staff said the 0.1 floor would have impacted 264 hours, 2.58% of the total hours, between August 2017 and September 2018.

Gabel Associates’ Travis Stewart criticized the proposal for limiting the ability for storage resources to participate in the market by putting a floor on the replacement ratio. He said his storage-owning clients are willing to discuss ways to correct the issue that don’t limit the resources’ market access.

“This solution, I don’t really know that it gets us where PJM really wants to go,” he said.

“That revenue is a very important for some resources,” Dayton Power and Light’s John Horstmann said. “They’re kind of on the edge because of other changes PJM has made” in the market.

Susan Bruce, who represents the PJM Industrial Customer Coalition, strongly supported the measure to address unintended “aberrant and costly results.”

Both arguments seemed to resonate with Direct Energy’s Marji Philips.

“I’m not trying to drive to price outcome here; I’m trying to drive to what is best for the market,” she said, noting there is an ongoing effort in PJM’s Energy Price Formation Senior Task Force to support inflexible units and that batteries provide a “counter” to that. “I’m trying to vote the right way here, which is sort of balancing letting the right technology in versus getting the markets right.”

“It looks to me like we’re fixing the low-hanging fruit of a much larger problem,” Calpine’s David “Scarp” Scarpignato observed.

“I would agree with you,” Morelli said. “We recognize that there are some flaws in the regulation market design.”

“The underlying issues are the same that we have been discussing for over a year, so they’ve been known for a while. The effects on market prices became more common after the issues were first discussed in the stakeholder process. Changes in offer behavior can increase the frequency of inefficient high prices,” the Monitor’s Catherine Tyler said.

Morelli said fixing the problem “in a holistic manner” would require reopening the Regulation Market Issues Senior Task Force, which “given that process took well over a year, I don’t expect that that will come to a speedy conclusion.”

Instead, PJM hopes to implement the “narrowly targeted” proposal to “address this very narrow piece of the puzzle as a stop-gap measure” and then return to the issue “early next year” to resolve the issues in a way that addresses FERC’s reasons for rejecting the first attempt, she said. The change wouldn’t be implemented until FERC approves it and the ongoing settlement that resulted from the rejection is completed.

Some stakeholders questioned whether the proposal encroached on issues being addressed in the settlement proceedings, but PJM’s Stu Bresler didn’t see a “direct conflict in any way shape or form” between the two.

Horstmann suggested deferring the vote until the Dec. 6 MRC meeting to allow PJM time to quantify the market revenue impact of the proposed change and to allow more storage resources to participate in the discussion, which Philips seconded. However, PJM staff and Dominion Energy’s Jim Davis objected to a delay.

“We would like to see a vote today on the issue,” he said.

The deferral motion failed with 1.87 in support in a sector-weighted vote that had a 3.34 threshold for adoption.

An acclamation vote approved the problem statement and issue charge with one opposed and one abstention. Endorsement of the stop-gap proposal passed with 4.09 in favor in a sector-weighted vote that also had a 3.34 approval threshold. The proposal was also subsequently approved in the MC by acclamation with four opposed and two abstentions.