PJM working on ‘shortage pricing’ issues triggered by weather events

The results of the energy market, the results of the capacity market and the results of the regulation market were competitive in 2014 in the PJM Interconnection region, said a report issued March 12 by Monitoring Analytics LLC, the independent market monitor for PJM.

“The PJM markets work,” the report said. “The PJM markets bring customers the benefits of competition. The goal of competition is to provide customers wholesale power at the lowest possible price, but no lower. The state of the PJM markets in 2014 reflected the extreme winter weather conditions in January and a return to more typical weather conditions in the rest of the year. The stress on the markets during the winter weather was a reminder that markets must work during extreme conditions as well as more normal conditions. PJM markets did work during the extreme conditions but the experience highlighted areas of market design that need improvement.

“The PJM market design must be robust to stress. Markets that only work under normal conditions are not effective markets. Continued success requires markets that are flexible and adaptive. However, wholesale power markets are defined by complex rules. Markets do not automatically provide competitive and efficient outcomes. Despite the complex rules, these are markets and not administrative constructs, and have all the potential efficiency benefits of markets. There are areas of market design that need further improvement in order to ensure that the PJM markets continue to adapt successfully to changing conditions.

“The details of market design matter. The overall energy market results support the conclusion that energy prices in PJM are set, generally, by marginal units offering at, or close to, their marginal costs, although this was not always the case during the high demand hours in January. This is evidence of generally competitive behavior, although the behavior of some participants during the high demand periods in January raises concerns about economic withholding. The performance of the PJM markets under scarcity conditions 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. In particular, there are issues related to the ability to increase markups substantially in tight market conditions, to the uncertainties about the pricing and availability of natural gas, and to the lack of adequate incentives for unit owners to take all necessary actions to acquire fuel and generate power rather than take an outage.

“One of the symptoms of these issues was an unprecedented increase in uplift charges in January. The energy market reflected the combination of increased, weather related, demand and higher fuel costs in higher energy market prices. The load-weighted average [locational marginal price] was 37.4 percent higher in 2014 than in 2013, $53.14 per MWh versus $38.66 per MWh. The increase in prices was a combined result of higher fuel prices and higher demand. If fuel costs in 2014 had been the same as in 2013, holding everything else constant, the load-weighted LMP would have been lower, $47.43 per MWh instead of the observed $53.14 per MWh. While fuel costs contributed to higher prices, the load-weighted average LMP would still have been 22.7 percent higher in 2014 than in 2013 even if fuel costs had not increased. Higher demand in the first quarter was the reason for this increase.”

In 2014, shortage pricing was triggered on two days in January. On Jan. 6, shortage pricing was triggered by a voltage reduction action that was issued at 1950 EPT and terminated at 2045. On Jan. 7, shortage pricing was triggered by a shortage of primary and synchronized reserves starting in the hour beginning 0700 EPT and was in effect until 1220 during the morning peak as well as between 1755 and 1810 during the evening peak.

“The performance of the PJM markets under scarcity conditions raised a number of concerns including the adequacy of capacity market incentives, the competitiveness of participant offer behavior under tight market conditions, reasons for the lack of natural gas availability and pricing, the performance and obligations of demand response and the treatment of interchange transactions,” said the report.

Monitoring Analytics recommends a series of changes to fix these problems, including:

  • that PJM require all generating units to identify the fuel type associated with each of their offered schedules ( was adopted in full in Q4 2014.);
  • that the definition of maximum emergency status in the tariff apply at all times rather than just during maximum emergency events (Status: Not adopted);
  • that PJM not use the ATSI closed loop interface or create similar interfaces to set zonal prices to accommodate the inadequacies of the demand side resource capacity product (Status: Not adopted); and
  • that the roles of PJM and the transmission owners in the decision making process to control for local contingencies be clarified, that PJM’s role be strengthened and that the process be made transparent (Status: Not adopted).

PJM Interconnection operates a centrally dispatched, competitive wholesale electric power market that, as of the end of 2014, had installed generating capacity of 183,724 MW and 945 members including market buyers, sellers and traders of electricity in a region including more than 61 million people in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. 

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.