By Suzanne Herel

PJM’s wholesale energy, capacity and regulation markets were competitive for the first half of the year, but there is room for improvement, according to the second quarter State of the Market Report by Monitoring Analytics. The Independent Market Monitor made new recommendations for the energy, capacity and ancillary services markets.

During periods of high demand, the market’s performance “raised a number of concerns related to capacity market incentives, participant offer behavior in the energy market under tight market conditions, natural gas availability and pricing, demand response and interchange transactions,” the report said.

The report also called efforts to subsidize uneconomic units a “threat” to PJM market design.

The report includes five new recommendations and one modified recommendation. Two are classified as high priority; the others are ranked medium.

One of the high priority items concerns the capacity market. The Independent Market Monitor said that the costs incurred by pseudo-tied units should be borne by the unit and included in its offers into the market.

The other, first reported in 2012, calls for the emergency load response program to be treated as an economic resource that does not only respond after an emergency has been called.

The medium recommendations were:

• Energy market: Clearly state the policy on the use of constraint relaxation and price-setting logic.
• Capacity market: Re-evaluate mitigation rules for offers by demand resource and energy efficiency resources.
• Capacity market: Eliminate the energy efficiency add-back mechanism so market clearing prices are not impacted.
• Ancillary services: Eliminate separate payments for reactive capability and have generators recover its cost in the capacity market.

Prices, Demand Down

Lower fuel prices and less demand caused energy market prices to drop significantly over the first half of last year, the report said.

The load-weighted average real-time LMP was $27.09/MWh, a 36% drop from $42.30/MWh in 2015.

Average real-time load dropped 5.3% year over year, from 90,586 MW to 85,800 MW.

Net revenue, a measure of market performance and of the incentive to invest in new generation, decreased in the first six months of the year relative to 2015.  Total net revenues, including both capacity and energy, dropped for a new combustion turbine (-50%), combined cycle (-41%), coal plant (-75%), diesel (-81%), nuclear plant (-46%), wind installation (-31%) and solar installation (-44%).

Combustion turbines (CTs) and combined cycle units (CCs) that entered the PJM markets in 2007 in three representative locations did not cover their total costs, including the return on and of capital. CTs and CCs that entered the PJM markets in 2012 did cover their total costs in the eastern PSEG and BGE zones but did not cover their costs in the western ComEd zone.

Mild winter weather, paired with low fuel prices and LMPs, enabled PJM to reduce uplift charges from $240.3 million to $63.9 million, a 73% cut.

Congestion costs dropped from $918.6 million to $479.1 million, a 48% reduction.

The report also said that auction revenue rights were not an effective way to return revenue to load. Together with financial transmission rights, they offset 86.5% of total congestion costs for the 2015 to 2016 planning period.