By Rory D. Sweeney

PJM’s Independent Market Monitor remains unconvinced that performance metrics during localized load sheds should be used to calculate capacity market default offer caps.

Among the new recommendations in the Monitor’s quarterly State of the Market report released last week was that PJM’s capacity market default offer cap not include balancing ratios calculated for localized performance assessment intervals (PAIs) but only use PAIs triggered on at least a sub-zonal or zonal level.

The recommendation could signal the re-emergence of a fight to revise how PJM calculates balancing ratios, which went on throughout the year. At the October Members Committee meeting, stakeholders declined by the slimmest of margins endorsement of proposed Tariff revisions that would change how the RTO estimates the expected future balancing ratio used in the default market seller offer cap. That leaves PJM using its current method, which requires PAIs to perform the calculation, but the RTO hadn’t experienced any such events until this year. Though both events were very localized, PJM staff assured stakeholders they could be used for calculating the balancing ratio.

The Monitor wasn’t so sure and warned at the time that it would revisit the issue. (See “Market Seller Offer Cap Balancing Ratio,” PJM MRC/MC Briefs: Oct. 25, 2018.)

The other new recommendations included:

• PJM should better define its rules for unit-specific parameter adjustments “to ensure market sellers know the requirements.”
• Generators should have to request use of inflexible sell-offer segments, which should only be permitted for defined physical reasons.
• The $7.50 margin in the definition of the cost of Tier 2 synchronized reserves should be removed because it’s “a markup and not a cost.”
• In the calculation of the penalty for a Tier 2 resource failing to meet its scheduled obligation during a spinning event, the actual number of days since the last event greater than 10 minutes should be used instead of the average number of days between events.
• Aggregation should not be permitted to offset unit-specific penalties for failing to respond to a synchronized reserve event.
• Offers in the day-ahead scheduling reserve (DASR) market should be based on opportunity cost only to eliminate market power, and payments for reactive capability should be based on the 0.9 power factor that PJM has determined is necessary.
• PJM should re-evaluate the rules governing cost-benefit analysis and cost-allocation for economic projects in its planning for generation and transmission.

The Monitor also reiterated its concern with PJM’s capacity market, giving all of the RTO’s other markets a passing grade — with caveats — for the nine months from January through September.

Resilient Grid, Resilient Market

The Monitor noted that the structure of the capacity market is not competitive because, for almost all auctions held since 2007, the results have failed the Monitor’s three-pivotal-supplier (TPS) test both within all load delivery areas and PJM-wide. The TPS test measures the degree to which the supply from three suppliers is required in order to meet the demand in a specified market.

“The outcome of the 2021/2022 [Reliability Pricing Model] Base Residual Auction was not competitive as a result of participant behavior which was not competitive, specifically offers which exceeded the competitive level,” the report said, noting that several aspects of the RPM “still threaten competitive outcomes.”

The Monitor listed replacement capacity, unit offer parameters, allowing imports to substitute for internal resources, the default offer cap and allowing demand response to substitute for capacity as ways to improve competitiveness across PJM markets.

The Monitor said energy market results were competitive, though the RTO-wide market structure was not competitive every day, and the local market structure wasn’t competitive because of “highly concentrated ownership of supply in local markets created by transmission constraints and local reliability issues.”

The synchronized reserve, DASR and regulation market results were competitive, though the Monitor criticized all three markets for also having high ownership concentrations. “A significant portion” of day-ahead scheduling offers also “reflected economic withholding,” the Monitor concluded. The regulation market design is flawed, the Monitor said, because it continues to use an incorrect definition of opportunity cost.

The financial transmission rights auction market results were competitive, though its design is also flawed, the Monitor said, because auction revenue rights are not defined clearly enough and therefore “holders cannot determine the price at which they are willing to sell rights to congestion revenue.”

The Monitor also used the report to advocate for its proposed revision of the capacity market. The issue is currently in a paper hearing before FERC. (See PJM Stakeholders Hold Their Lines in Capacity Battle.)

“The wholesale power grid is clearly resilient. The focus should be on ensuring that ongoing challenges to resilience are analyzed and addressed within a market framework. The real resilience question is whether the market construct itself is resilient. Can markets, and the market-based regulatory construct, coexist with efforts to increase the role of renewable resources through nonmarket revenue?” the Monitor wrote. “The solution must recognize that states have authority over generation and can choose to reregulate at any time.”

However, state policies are also harming markets, the Monitor said.

“Subsidies to specific resources that are uneconomic as a result of competition are an effort to reverse market outcomes with no commitment to a regulatory model and no attempt to mitigate negative impacts on competition. The unit-specific subsidy model is inconsistent with the PJM market design and inconsistent with the market paradigm and constitutes a significant threat to both,” the Monitor wrote.

The Monitor said the Sustainable Market Rule (SMR) it has proposed will “harmonize” the “three salient structural elements: state nonmarket revenues for renewable energy; a significant level of generation resources subject to cost of service regulation; and the structure and performance of the existing market-based generation fleet.”

“Harmonizing means that the integrity of each paradigm is maintained and respected. Harmonizing permits nonmarket resources to have an unlimited impact on energy markets and energy prices. Harmonizing means designing a capacity market to account for these energy market impacts, clearly limiting the impact of nonmarket revenues on the capacity market and ensuring competitive outcomes in the capacity market and thus in the entire market,” the Monitor wrote. “The expected impact of the SMR design on the offers and clearing of renewable resources and nuclear plants would be from zero to insignificant. The competitive offers of renewables, based on the net ACR [avoidable cost rate] of current technologies, are likely to clear in the capacity market. The competitive offers of nuclear plants, based on net ACR, are likely to clear in the capacity market.”