By Suzanne Herel

PJM should tighten rules on demand response and market power, the Independent Market Monitor said in its third-quarter State of the Market Report.

The report, which included eight new recommendations, concluded that the RTO’s energy, capacity and regulation markets were competitive for the first nine months of the year.

“The markets are working pretty well,” Monitor Joe Bowring said in an interview. But, he said, “there is still progress to be made in some of the details of the capacity market rules, and we’re concerned about some of the proposed changes to market rules, particularly the hourly offer flexibility.”

The study, released Thursday, found that energy market prices dropped by one-third compared with the same period last year, due to lower fuel prices and decreased demand. The load-weighted average real-time locational marginal price was $38.94/MWh compared with $58.60/MWh in 2014.

Uplift decreased 68% in the first nine months over a year ago, from $899.1 million to $285.7 million, but Bowring said the charges remain high, in large part because of inflexible unit parameters based on rigid gas supply arrangements.

The report said that the Capacity Performance rules will address those problems in the future.

“Outages were high, performance incentives remain weak and there is no resolution of the disconnect between the incentives facing electric generating units and the incentives facing gas pipelines, which is a barrier to the construction of new pipeline capacity,” the Monitor said.

Bowring noted his particular concern over the ability of generators to place hourly instead of daily offers.

“The PJM market design incorporates a variety of rules designed to help ensure competitive outcomes,” the report said. “When basic elements of those rules are modified, e.g. the raising of the overall $1,000/MWh offer cap and the introduction of hourly offers in place of daily offers, it is essential that effective market power mitigation be maintained.

“A direct and effective substitute for the current market power mitigation rule limiting units to one offer per day would be to limit any hourly offer changes during the day to changes in the cost of fuel. The failure to maintain limits on aggregate market power will lead to the exercise of market power and the associated negative impacts on the competitiveness of PJM markets.”

The report also found that net revenue for new entrants was down for the first nine months, decreasing 13% for a combustion turbine, 18% for a combined-cycle, 53% for a nuclear plant, 20% for wind and 5% for solar.

Congestion charges dropped by 33% from $1.7 million for the first nine months of 2014 to $1.1 million this year.

The report included eight new recommendations, three listed as high priority. One concerns the energy market and two address demand response, provided that DR remains in the wholesale market following the Supreme Court’s ruling in the Electric Power Supply Association challenge. (See FERC Jurisdiction over DR in Peril as Supreme Court Splits.)

• The rules around the three pivotal supplier test should be clarified and documented. In addition, markup should be constant across price and cost offers; there should be at least one cost-based offer using the same fuel as the available price-based offer; and the parameters of the cost-based offer should be at least as flexible as the parameters of the available price-based offer.
• PJM should require nodal dispatch of demand resources with no advance notice required. Alternately, if nodal location is not required, subzonal dispatch of DR with no advance notice should be mandatory.
• PJM should eliminate the measurement of DR compliance across zones within a compliance aggregation area. “The multiple zone approach is less locational than the zonal and subzonal approach and creates larger mismatches between the locational need for the resources and the actual response.”

The remaining recommendations were of medium and low priority and regarded uplift and planning, respectively.

PJM spokesman Ray Dotter had no specific comment on the recommendations, saying only that many “appear consistent with the themes of prior State of the Market reports.”

“PJM looks forward to working with the Independent Market Monitor to flesh out these new recommendations to ensure a complete understanding and to determine how they may be addressed, including through potential introduction into the stakeholder process,” he said.