PJM congestion costs in 2015 dropped by $546m, MMU says

The PJM Interconnection (PJM) saw grid congestion costs drop by 28.3% in 2015, or $546.9m, compared with the 2014 level, the PJM Market Monitoring Unit (MMU) said in a March 10 report.

Congestion costs were $1.385bn in 2015, compared with $1.932bn in 2014, according to the 2015 State of the Market Report for PJM from Monitoring Analytics LLC, which serves as the MMU for PJM.

Congestion reflects the underlying characteristics of the power system, including the capability of transmission facilities, fuel costs, the geographic distribution of generation facilities and load conditions, the report said.

“Congestion is neither good nor bad, but is a direct measure of the extent to which there are multiple marginal generating units dispatched to serve load as a result of transmission constraints and the costs of operating those units,” the MMU said.

Financial Transmission Rights (FTRs) and Auction Revenue Rights (ARRs), which are instruments that enable the holders of FTRs or ARRs to hedge the cost of moving power from different points on the transmission grid based upon locational market prices (LMPs), helped offset congestion costs, the report said.

Energy market prices decreased significantly from 2014 due to a combination of lower fuel prices and lower demand, Monitoring Analytics said. The load-weighted average real-time LMP was $36.16/MWh in 2015, or 31.9% lower than in 2014, when it was $53.14/MWh. While fuel costs contributed to lower prices, the load-weighted average LMP still would have been 21.1% lower in 2015 than in 2014 even if fuel costs had not decreased, the MMU said.

Energy prices in PJM in 2015 were set, on average, by generation units operating at, or close to, their short run marginal costs, although this was not always the case during high demand hours, the MMU said. This is evidence of generally competitive behavior and resulted in a competitive energy market outcome.

Net revenue is a key measure of overall market performance as well as a measure of the incentive to invest in new generation to serve PJM markets. In 2015, average energy market net revenues decreased by 23% for a new combustion turbine, 27% for a new combined cycle unit, 66% for a new coal plant and 38% for a new nuclear plant.

While net revenues were lower for new entrant units in 2015 than in 2014, the comparison to 2014 reflects the very high net revenues in January 2014, the MMU noted. Net revenues from all markets in 2015 continued to exceed the net cost of new entry for new natural gas-fired units in most eastern PJM zones.

The report included 27 recommendations for market improvements at PJM. Among those recommendations for the transmission sector are that PJM require that project cost caps on new transmission projects be part of the evaluation of competing projects.

The MMU also recommended that PJM enhance the transparency and queue management process for merchant transmission investment, including issues related to data access and complete explanations of cost impacts.

“The goal should be to remove barriers to competition from merchant transmission,” the MMU said in the report.