By David Jwanier, Ted Caddell and Rich Heidorn Jr.

WASHINGTON — PJM may propose changing capacity market rules to provide premiums for nuclear plants and others with firm winter fuel supplies, Executive Vice President for Operations Mike Kormos said Tuesday.

Kormos floated the proposal at a Federal Energy Regulatory Commission technical conference on the impacts of the record-breaking winter. The proposal received a positive response from acting FERC chair Cheryl LaFleur and Commissioner Philip Moeller.

Kormos also reiterated proposals previously announced by PJM officials to limit unpredictable interchange swings that lead to uplift and to require generators to conduct winter start tests.

Although the date was April 1, participants in the conference made clear that the stresses the winter put on the electric system was nothing to fool around about.

“Reliability was sustained but in several instances was close to the edge,” LaFleur said in opening the day-long session.

“We have to assume we’ll have another winter not just like this year, but perhaps even worse,” said Moeller. He said state regulators could reduce the stress of peak demand days by exposing consumers to real-time prices.

“This winter was an example of the very thing that keeps me up at night,” said Donald Schneider, president of FirstEnergy Solutions. “How did we, as regulators and operators responsible for keeping the lights and heat on for our customers, get to a place where we were nearly 500 megawatts away from depleting all synchronized reserves on the system?”

In January, PJM broke its winter demand record, with average loads 20,000 to 40,000 MW above normal — the equivalent of 20 to 40 nuclear plants, Kormos noted. Forced outage rates were two to three times higher than normal, the worst since the ice storms of 1994. PJM saw about $500 million in uplift costs in January — equal to 70% of the total uplift for all of 2013.

MISO, NYISO and SPP also set new winter demand records, while ISO-NE fell just short of its all-time high. (See related story, Winter 2013-14 By the Numbers.)

In addition to FERC staff, 22 panelists spoke during the session, including Maryland Public Service Commissioner Lawrence Brenner and Paula Carmody, head of the Maryland Office of People’s Counsel. Numerous PJM staffers and stakeholders listened from the audience. FERC will accept comments in the docket (AD14-8) until May 15.

Many of the panelists focused on the high power and natural gas prices and challenges aligning the gas industry to generators’ needs. The Consumer Advocates of PJM States and others have asked FERC to investigate whether market manipulation or withholding contributed to the high prices. Commissioner John Norris said FERC has seen no evidence of manipulation or withholding. (See related story, States Seek Answers to High Prices.)

Maryland’s Brenner was one of several speakers who cautioned against responding to the challenges with a pipeline- and generation-building spree, saying reliability needs must be balanced against costs.

Instead, he said RTOs should redouble their efforts to improve the coordination of energy and capacity across seams. “If you do it right, you are going to solve so many other issues,” he said.

Gas Rule Changes Needed

FERC staff told the conference that the high gas prices resulted largely from unusually high demand in both the Northeast and Southeast on the same days in January.

Kormos said PJM’s costs were inflated not only by high commodity prices but by “take or pay” provisions and other rules that limited flexibility.

On Friday, Jan. 10, for example, some gas-fired generators told PJM that they would have to purchase gas and run through the entire Martin Luther King Jr. holiday weekend to ensure their availability the following Tuesday morning.

“The relative lack of transparency of these secondary markets, which often bundle transportation and supply, left PJM in [an] untenable position,” Kormos said in a statement submitted to FERC. “Under normal market conditions, natural gas prices of a $100 per MMBtu result in gas-fired units being utilized as reserves or peaking units, generating only a few hours at high costs to meet peak load requirements. During the extreme cold weather events of January, PJM was required to schedule these high-cost peaking units over an extended duration, or risk the peaking units being altogether unavailable.”

Kormos said more changes are required than simply realigning gas nomination and scheduling. (See FERC: Six Months to Move Gas, Electric Schedules.)

“While we appreciate moving the gas day, we’d like them to work weekends,” he said to laughter from the audience.

Gas pipeline officials who spoke later insisted their companies also work seven days a week. The challenge, they said, is coordinating with the owners of gas available for resale, some of whom don’t run round-the-clock operations.

Attorney Donald Sipe, who represents the American Forest and Paper Association, proposed creation of an information and trading platform to allow a better match of real-time supplies and fuel demand. Sipe said such a platform would take bids for gas and pipeline capacity and provide a central clearing mechanism, applying lessons learned by RTOs.

“We had exactly the same set of problems 25 years ago in the electric industry,” Sipe said. “What changed was not the laws of physics. What changed was better processing of information.”

“We think this can be done incrementally,” Sipe added. “We don’t think you have to suddenly establish an RTO for gas.”

The proposal was greeted warily by other panelists. “I would urge a thorough evaluation from an engineering perspective of where we’re heading,” said FirstEnergy’s Schneider.

“There’s a lot of complications when you start to look at the physics of the molecules that have to be moved,” said James Stanzione of National Grid.

Abe Silverman, of NRG Energy, said the commission should implement easier changes before embarking on an “[Order] 888 kind of restructuring for the gas side.”

Moeller, who asked for Sipe’s inclusion on the panel, said he’d like to explore his idea. “It’s a very inefficient market right now,” he said.   

Capacity Market Changes

Moeller also said he found PJM’s proposal for providing more capacity revenue to nuclear plants “very intriguing,” although not a short-term fix. “If we do it in the capacity market that’s four or five years away” taking into account the three-year forward market and time for the stakeholder process, he said in an interview after the session. (See related story, Looking Ahead – Winter 2014-15.)

In her closing remarks, LaFleur also expressed support: “We are open to proposals to price more fuel security into capacity,” she said.

FirstEnergy’s Schneider also appeared to back the concept. “You cannot have the backbone of the electric system … operated on an essentially `just-in-time’ interruptible fuel supply,” he said.

Kormos cautioned that PJM had not crafted a specific proposal. He said such an initiative would likely cover not only nuclear plants, which typically refuel once every 24 months, but also oil and coal generators with on-site storage and annual demand response.

Including gas generators would require defining “What does it mean for a gas unit to have firm transmission and supply?” he added. “If prices hit $100 [per mmBtu] can they sell it?”

Winter Start Test

Kormos reiterated two proposals made in stakeholder meetings last month.

One, prompted by the high outage rates in January, would require generation operators to run start-up tests on their units before the coldest winter weather arrives. (See Winter Testing May Be on the Horizon.)

Kormos noted that PJM plants scheduled for retirements had outage rates of 40% to 50%. “They’re not putting a lot of money in these units,” Kormos said. “A lot of generation is struggling to make money. We’re just not seeing the [operations and maintenance spending] we used to see.”

Interchange

Kormos also said PJM may need to change its rules for scheduling imports from neighboring regions because the RTO’s ability to forecast interchange is “horrible.”

Expecting 5,600 MW in imports for the evening peak on Jan. 7, PJM operators dispatched demand response and high-cost gas generators. When actual interchange came in almost 3,000 MW higher, operators had to absorb the costs of the other resources as uplift.

If interchange is unpredictable, Kormos said, “It’s not saving the customers money.”

At the Market Implementation Committee meeting last month, some PJM stakeholders expressed concern over a proposal that would allow dispatchers to cut interchange ramp limits with little advance notice. (See Ramp Limits Cause Stir at MIC.)

On Tuesday, Kormos said PJM might consider requiring interchange transactions be scheduled two or three hours in advance so that operators can avoid having too much supply. Current interchange rules allow scheduling with only 15 minutes’ notice.

Kormos said the unexpected imports contributed to PJM’s $500 million in uplift costs in January. Said Kormos: “Half a billion is a lot of money, even in PJM.”