UPDATE -- State of the Market: PJM Passes, with Provisos

UPDATE — State of the Market: PJM Passes, with Provisos

Mar 25, 2014

In its State of the Market report for 2013, the Market Monitor listed several high-priority tasks for the coming year.

By David Jwanier and Ted Caddell

WASHINGTON — The 2013 PJM State of the Market was, to quote that noted economist Yogi Berra, mostly “déjà vu all over again.”

The 2012 report had called for substantial changes to the capacity market, demand response and the treatment of uplift. The 2013 report, which was unveiled by Market Monitor Joe Bowring during a press briefing March 13 in Washington, identifies shortcomings in the same areas.

The results of five of six markets — Energy, Capacity, Synchronized Reserve, Day-Ahead Scheduling Reserve and FTR Auctions — were judged competitive, as in 2012, along with the Regulation Market, which was judged not competitive for most of 2012.

Capacity Market

While the Capacity Market remains competitive, the 444-page report by Monitoring Analytics labeled the aggregate market structure and local market structure as not competitive, as in most prior years since 2007. (See sidebar, PJM 2013 by the Numbers.)

Bowring’s recommended changes for the market were no surprise either. Among them: requiring that all resources be physical; making all demand response a year-round product subject to must-offer rules; and requiring all imports be pseudo tied.

Alternatives to internal generation must be “full substitutes,” not the currently “inferior products” that are suppressing capacity prices, Bowring said.

“If demand response is going to be in the capacity market … it should be available every hour and it should be treated as a real product. It is a real product,” he said. The report calls for classifying all demand response as Economic and eliminating Limited and Extended Summer DR.

Bowring said DR providers can build such generation “substitutes” by aggregating resources into portfolios, a requirement he acknowledged would make DR more expensive.

Generation at Risk

Under current rules, Bowring said, DR and imports are suppressing capacity prices, particularly in western PJM. Add in low natural gas prices, which have caused LMPs to fall, and the result is 87 generators, totaling 14,597 MW of capacity, at risk of retirement. That is in addition to the 24,933 MW currently planning to close.

The 87 generating units — combustion turbines, coal, gas, oil and dual-fuel plants — were unable to cover avoidable costs in 2013 or didn’t clear the 2015/2016 or 2016/2017 base capacity auctions.

Although the report did not assess the viability of PJM’s existing nuclear fleet, Bowring said he was not surprised by reports that Exelon Corp. is threatening to close three of its nuclear generating stations in Illinois. (See Exelon in Lobbying Push to Save Ill. Nukes.)

Bowring said although he lacked data to calculate the current nuclear fleet’s operating costs, no new nuclear plant could be profitable under current prices. “The net revenues are only covering 30% or so of costs,” he said.

At the other end of the spectrum, revenues for solar generation in the PSEG zone were double their fixed costs, due largely to state and federal subsidies.

Uplift

Energy uplift increased by $231 million, or 36%, in 2013. The two main culprits were reactive services, with an increase of $263.5 million, and black starts, which were up $78.2 million. Balancing and day-ahead charges dropped.

The report says PJM should increase its transparency by having operators record the reasons for dispatching out-of-merit generators and identifying the units that are receiving uplift payments.

Ten generating units — less than 1% of all units — received 38% of all uplift in 2013, but PJM confidentiality rules prohibit these units from being identified.

“All uplift payments should be public information. They are [currently] totally non-transparent,” Bowring said. “No one in the market really understands what’s going on.”

Identifying the causes of uplift and the generators receiving payments would allow competition to reduce those costs, he said.

In addition, the report says up-to congestion trades should be required to pay uplift charges like other virtual transactions.

Interchange Ramp

Bowring was adamant in his opposition to a proposal floated by PJM officials earlier this month that would allow operators to reduce interchange ramp limits to reduce price volatility. (See Ramp Limits Cause Stir at MIC.)

“In our view, we see nothing wrong with [price] swings. It’s what happens in markets. [PJM] operators should not be concerned with price volatility,” Bowring said.

Competitive Concerns

Joe Bowring presenting the 2013 State of the Market Report

While the Monitor found all market results were competitive, it expressed concern over the potential for anticompetitive behavior by generators, particularly those owned by holding companies that are also transmission owners.

The report recommends that PJM consider rules to ensure that incumbent generation owners cannot use Capacity Injection Rights (CIRs) to hamper entry by competitors.

Under current rules, companies that retire generation retain CIRs for one year and have the ability to sell them.

The Monitor said stakeholders should decide whether CIRs are considered property rights of generation owners or should revert to the system upon a plant’s retirement. Companies lacking CIRs face higher interconnection costs than those possessing them.

The Monitor also recommended that interconnection studies, currently performed by incumbent transmission owners, be outsourced to an independent party. The current practice “could result in a conflict of interest when transmission owners have generation interests,” the Monitor said.