By Rory D. Sweeney

WILMINGTON, Del. — Independent Market Monitor Joe Bowring said Thursday that that the PJM market is competitive and healthy, despite what some stakeholders believe are uneconomically low energy prices.

LMPs were lower in 2016 than they have ever been since organized markets began, which “is a testament to competitive markets,” Bowring said during a Members Committee briefing on the 2016 State of the Market report. “Prices are not too low. We don’t need to artificially raise prices. They are what they are.”

Despite the market changes created by the introduction of the Capacity Performance model, “prices have been consistent with historical levels,” he said.

Combined cycle units, for example, did “relatively well” in 2016, he said. “Even though their margins are smaller, they are in fact making it up on volume.”

That does, however, create one issue, he said: While combined cycle units have become baseload resources, coal-fired units have shifted to an intermediate role, which is problematic because they can’t ramp up and down well. Coal steam units recorded a 32.5% capacity factor for the year, down sharply from 2015’s 43.8%. Combined cycle plants had a 62% capacity factor in 2016, almost unchanged from 2015.

Generator Markups

Bowring’s presentation focused heavily on the impact of markups, which is the difference between a market seller’s market-based offer and its cost-based offer, which reflects the generator’s marginal costs. The Monitor’s data showed that coal-fired plants often had negative markups in 2015 and 2016.

“I think [the market] is very healthy. I think it’s competitive. I think it’s showing us Manual 15 is wrong, and coal units don’t need a 10%” adder, Bowring said. The manual permits generators’ cost-based offers to include a 10% adder above their marginal costs; it was intended as a cushion against uncertainties, including fuel prices and heat rates that can vary with temperatures and plant loading.

FirstEnergy’s Jim Benchek questioned Bowring’s observation, saying coal units have “really legitimate reasons” for offering negative markups.

Bowring explained that higher markups can be exercises of market power — or an indication that the operators simply don’t want the unit to run. He presented a graph that showed the cumulative number of unit intervals with markups above $150/MWh. The graph showed a major spike in mid-February 2015, which he said coincided with a cold snap that might entice market sellers to exercise market power.

Algorithmic Definition

Bowring also said it’s “staggering to me” that PJM refuses to evaluate fuel-cost policies based on algorithmic standards.

In a ruling Feb. 3, FERC sided with the RTO in requiring that fuel-cost policies be verifiable and systematic but not algorithmic, as the Monitor had proposed. (See PJM Fuel-Cost Policy Changes to Take Effect in May.)

FERC’s order quoted the Monitor as saying the policies should be based on broker quotes, bilateral offers or index prices. The commission said the Monitor’s position that policies be “algorithmic under all circumstances” ignores that natural gas markets can become illiquid during stressed conditions, potentially understating generators’ real costs.

The Monitor said it defines “algorithmic” as simply meaning a step-by-step process to get from a defined input to an output.

“It’s very, very simple, very, very basic,” Bowring said Thursday. “You can’t have a verifiable anything unless it’s algorithmic.”

Bowring also questioned the notion that PJM’s energy production is becoming less fuel diverse, presenting a Fuel Diversity Index that shows little change since its beginning in 2000.

Bowring released the State of the Market report earlier this month, warning that state plans to subsidize unprofitable generating resources present “a very real threat” to wholesale electricity markets. (See PJM Monitor Concerned About State Subsidies.)