By Christen Smith

PJM’s wholesale power markets remain “under attack” from those concerned about the retirements of legacy generators unable to profit in the face of ever-decreasing energy prices, the Independent Market Monitor said Thursday.

In its quarterly State of the Market report released last week, the Monitor — in a thinly veiled dig at PJM’s minimum price offer rule (MOPR) revisions pending before FERC — said there’s no reason to exclude competitive capacity offers from any generator, nor artificially increase energy prices to benefit struggling nuclear and coal plants.

“The value of markets is under attack, from those who think energy prices are too low and from those who think that market outcomes do not favor their preferred technology, whether it is nuclear, coal, wind or solar,” the Monitor said.

Instead, PJM should prevent the markets from reverting back to an integrated resource planning approach “that some would reimpose because markets provide technology-neutral incentives to all market participants, including those who will introduce technologies not yet in existence.”

“Markets continue to provide the most efficient way to organize the production of power at the lowest possible cost,” the report reads. “Markets are also the most efficient way to integrate state-supported renewable technologies.”

Record Low Energy Prices

The Monitor reported that energy prices decreased 35% to $27.49/MWh in the first six months of 2019, compared to the $42.44/MWh seen a year prior. Lower fuel costs contributed to nearly a third of the decline, while decreased load and lower mark-ups comprised the rest. These are the lowest load-weighted real-time energy prices ever seen in PJM, the Monitor said.

The lower prices drove down net revenues for all unit types, including: 65% for combustion turbines, 44% for new combined cycles, 87% for new coal plants, 30% for new onshore wind and 34% for new nuclear plants.

The last includes the subsidized Quad Cities and three other Exelon nuclear facilities in Illinois — Braidwood, Byron and LaSalle. Based on current forward prices, the Monitor said, all four of the plants will fail to recover their avoidable costs in two of the three forward years, with an average annual shortfall of 73 cents/MWh during the shortfall years.

Exelon told investors earlier this month that without substantive legislative action, the company will close unprofitable plants so as to not “damage the balance sheet sitting around for years with negative free cash flow or negative earnings.” (See related story, Exelon to Close Three Mile Island.)

The Monitor acknowledged PJM’s markets are imperfect and said a carbon price would provide a market-based solution to reducing emissions and supporting nuclear plants’ economics. But it said “the fact that some plants are uneconomic [without a carbon price] does not call into question the fundamentals of PJM markets. Many generating plants have retired in PJM since the introduction of markets, and many generating plants have been built since the introduction of markets.”

Energy Market Competitive, Capacity Market not

The Monitor said PJM’s energy market remains competitive while the capacity market does not — consistent with the Monitor’s conclusions in reports released in March and May. (See Energy Market Competitive in Q1, PJM Monitor Says.)

As an alternative to PJM’s MOPR for addressing the dilemma between “market solutions and potentially inconsistent state policy initiatives,” the Monitor again touted its proposed Sustainable Market Rule (SMR). (See PJM Monitor Reiterates Concerns in Quarterly SOM Report.)

Under the SMR proposal, all nonmarket resources could participate in the energy market without limits, with the capacity market used as a “balancing mechanism” for providing incentives for resources to enter and exit.

“The SMR approach to the capacity market design is simple, based in economic logic, based on the PJM competitive market design and does not require complex rule changes to implement,” the report reads. “The SMR would provide a straightforward way to harmonize federal and state approaches to the provision of energy, while respecting the distinction between federal and state authority. The SMR reaffirms the definition of a competitive offer in the PJM capacity market and removes noncompetitive barriers to the participation of renewables.”

The Monitor also criticized PJM’s energy price formation plan, saying that it guarantees double recovery for generation owners “by breaking the tight link between energy and capacity markets that has been essential to the success of the PJM market design.” It also accused the RTO of creating unintended consequences by pushing through substantial energy market revisions without any explanation of how such changes would “enhance or even maintain the competitiveness of the markets.”

The Monitor outlined five steps to address what it called legitimate concerns about price formation in the energy and reserves markets:

• Consolidate the tier 1 and tier 2 synchronized markets.
• Increase the scarcity price to reflect the highest generator energy offer allowed.
• Increase the transparency of operator actions, with explicit pricing for defined actions.
• Implement clear rules governing real-time pricing through the selection of real-time security constrained economic dispatch (RT SCED) and locational price calculator (LPC) cases. LPC, which uses the latest approved RT SCED case as its reference case, produces financially binding LMPs and reserve market clearing prices.
• Develop a consistent definition of energy and reserves products in the day-ahead and real-time markets, including recognition of the appropriate role of demand-side resources.

“This should not be the end of the discussion, but the beginning of a longer, more complete discussion which would lead to incremental steps to improve markets,” the report concluded.

Recommendations

The Monitor provided three new recommendations for PJM stakeholders to consider:

• Demand response reductions based entirely on behind-the-meter generation should be capped at the lower of economic maximum or actual generation output.
• Load and generation located at separate nodes should be treated as separate resources.
• FERC should require that the open firm flow entitlement (FFE) and firm flow limit freeze date issues be addressed at a technical conference, and that a deadline to resolve the issues that result from the freeze date be set. PJM, Outside Parties Slow MISO-PJM Freeze Date Thaw.)