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PJM debates energy price formation changes

New York (Platts)--21 Dec 2017 706 pm EST/006 GMT


As the PJM Interconnection advances the process of changing the way it calculates prices, stakeholders at a Thursday meeting discussed various market issues to be considered, including hedging, balancing congestion and demand curve modeling.

"We're trying to fully capture what we want in the discussion under energy price formation," Adam Keech, PJM's executive director of market operations, said during a webcast Markets and Reliability Committee meeting.

Due to changes in PJM's fuel mix, coupled with weak power demand growth in recent years, the grid operator in November proposed energy price enhancements to introduce more flexibility into its real-time and day-ahead markets that would more accurately value load-serving resources.

And while the stakeholder discussion process will continue through most of 2018, the first step is to agree on a problem statement and issue charge that will focus the conversation.

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There was a request to discuss how market participants can hedge and how uplift impacts the ability for them to hedge, Keech said. Specifically, stakeholders will evaluate "how hedging is used by participants to mitigate risk, the impact of uplift on hedging, and how changes to pricing rules impact forward and financial markets and existing bilateral contracts," according to proposed language added to the draft issue charge.

Uplift payments are made when there is a shortfall between a resource's offer and the revenue earned through market clearing prices.

A section was also added which gets at the concept of providing an initial assessment of changes that are not directly related to the calculation of prices, "but may be implicated by changing the calculation of prices," Keech said.

Meeting participants were keen to ensure the price formation initiative would not have unintended consequences on separate but related market issues that are important to their constituencies. For example, one meeting participant asked if modeling generation or transmission penalty factors would be considered.

The participant also asked if the impacts of price formation changes on balancing congestion, financial transmission rights and auction revenue rights would be evaluated.

"Especially balancing congestion, we've made a lot of changes over the past year and customers are still grappling with the impacts of some of those changes. So having a firm idea of what the reality of what the commercial market will be doing relative to some of these pieces will be very important for the customers that I represent," the participant said.

Keech agreed those issues will need to be further discussed.

MARKET MONITOR SAYS PROBLEM STATEMENT 'TOO NARROW'

PJM's market monitor has proposed an alternate problem statement.

"We think the PJM problem statement is too narrow," Monitoring Analytics President Joseph Bowring said.

He identified four areas of price formation that should be covered by the group: Pricing method, operating reserve demand curve modeling, market participant behavior and manual actions by PJM operators.

"We think these elements should be part of the problem statement," he said.

The ORDC is a way to calculate scarcity pricing in which prices increase as reserve levels decline.

The monitor ran a calculation that identifies potential scarcity pricing impacts based on the 215 shortage pricing events PJM identified during the recent 14- or 15-month period, Bowring said. They applied different penalty factors and calculated what the revenues would be "just to give folks an idea" of what the "impact would be on total scarcity rents and the impact on net revenues by basic type of unit."

Calculations were made for PJM's two scarcity pricing zones, MAD and RTO.

When asked why the monitor's problem statement/issue charge would take one to two years, as it says in the document, Bowring said they should work as "expeditiously as possible" to identify what people think are issues with price formation and make changes when needed "after thorough consideration."

"The worst thing we can do is do it in a half-baked way and come up with a bad solution ... this is a multibillion-dollar market with thousands of transactions being done with lots of participants, so we don't want to take chances with that," Bowring said.

--Jared Anderson, jared.anderson@spglobal.com

--Edited by Jason Lindquist, jason.lindquist@spglobal.com



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