Hot Topics in PJM: Price Formation and Public Policy Adam Keech Executive Director, Market Operations PJM Interconnection March 14, 2018

PJM as Part of the Eastern Interconnection Key Statistics Member companies 1,000+ Millions of people served 65 Peak load in megawatts 165,492 MW of generating capacity 176,569 Miles of transmission lines 82,546 2016 GWh of annual energy 792,314 Generation sources 1,304 Square miles of territory 243,417 States served 13 + DC Hsia- Updated 2/2017 21% of U.S. GDP produced in PJM 27% of generation in Eastern Interconnection 28% of load in Eastern Interconnection 20% of transmission assets in Eastern Interconnection As of 2/2017

PJM’s Role as a Regional Transmission Organization

PJM Markets

Initial driver was FERC “Price Formation Docket” (AD14-14) Background Initial driver was FERC “Price Formation Docket” (AD14-14) Relevant documents FERC Fast-Start NOPR – December 2016 PJM comments to Fast-Start NOPR – February 2017 Price Formation Workpaper – June 2017 Price Formation Whitepaper – November 2017 FERC 206 proceeding on Fast-Start Pricing – December 2017

Fast-Start Pricing vs. PJM Price Formation Proposal Fast-Start Pricing focuses on allowing inflexible fast-start units to set LMP FERC proposes that startup and no-load costs be included when these resources set price This application is done in MISO and ISONE PJM supports this in concept PJM’s Price Formation Proposal applies this concept across all units There are many details that require further discussion PJM expects the stakeholder discussion to inform those design decisions Other changes regarding shortage pricing are also important

Fast-Start Pricing: Current Status FERC closed the Fast-Start NOPR and opened separate 206 proceedings for PJM, SPP, NYISO PJM Tariff may be unjust and unreasonable Paper hearing Initial comments filed February 12, 2018 PJM’s comments were in support of enhancing fast-start pricing Reply comments are due 30 days after that FERC targeting an order by September 30, 2018

PJM Price Formation Proposal: Current Status PJM published its whitepaper in November 2017 to inform interested parties of PJM’s views on enhancing price formation Problem statement on price formation was approved at the December Markets and Reliability Committee meeting Initial task force meeting on January 18, 2018 Education sessions December 2017 (2) January 2018 (1)

Locational Marginal Price LMP = System Energy Price Transmission Congestion Cost Cost of Marginal Losses + + Included in the LMP Fuel costs and VOM for flexible generators Not included in the LMP Start-up and min load costs Cost of inflexible resources on the system Aligns LMPs with dispatch points of dispatchable resources because, generally, those are the only ones that can be marginal. This method was originally chosen due to simplicity in concept and implementation and because it aligns the LMP with dispatch points for dispatchable units. This is not the only method to calculate energy prices. This method has drawbacks as well. System Energy Price Represents optimal dispatch and cost to serve load ignoring congestion and losses Same price for every bus in PJM Congestion Price Represents price of congestion for binding constraints Calculated using cost of marginal units controlling constraints and sensitivity factors on each bus Will be zero if no constraints Will vary by location if system is constrained Loss Price Represents price of marginal losses Calculated using penalty factors Will vary by location Effect of Reserve Shortages Not a 4th component of the LMP Influences the magnitude of one of the 3 existing components Which component is impacted will depend on the location of the reserve shortage

Current LMP May Not Reflect the True Cost to Serve Load 510

Potential Price Formation Enhancements 2 1 Enhance the price calculation to ensure prices better reflect the actual cost of serving load by relaxing integer variables in the price calculation Utilize a separate pricing run of the SCED software to calculate LMPs * This process is done by other ISO/RTO for fast-start pricing 3 Compensate resources dispatched differently below what LMP would indicate for following dispatch

True Cost to Serve Load is More Transparent 510 20 Wind resource is paid a $200 lost opportunity cost payment.

Reserves are fundamental to maintaining reliability Reserve Market Design Reserves are fundamental to maintaining reliability PJM co-optimizes energy and reserves in the Day-ahead and Real-time Energy Markets Shortage Pricing refers to the set of market rules that govern how prices are calculated during reserve shortages PJM believes that these rules need to be reviewed There has been a consistent trend of high uplift during emergency periods that indicates these rules can be improved Winters of 2017/2018, 2015, 2014, and 2013

Shortage Pricing Enhancements Current Curve Enhance the Operating Reserve Demand Curves to better reflect the reliability value of reserves Proposed Curve

Expected Benefits of Integer Relaxation and Improved Shortage Pricing More Accurate Prices! Uplift Reduction More inclusion of operator actions in LMP Reduction in revenue shifts caused by uplift Reserve prices more reflective of the reliability value Improved Incentives Would correct incentive pitfalls of current model Improve performance incentives, especially during tight system conditions Values all resources needed to serve load Flexible resources can compete for infra-marginal rents Incentivizes flexibility Current method promotes inflexible bidding

Markets and Public Policy

Public Policy and Market Design Harmonizing Public Policy and Market Design Engage policymakers to increase understanding of the impacts of policy decisions Articulate how the energy market may facilitate policy changes Engage members, consumers and policymakers in a conversation about possible adjustments to market design

State / Federal Policies Trenton, NJ Harrisburg, PA Columbus, OH Annapolis, MD Springfield, IL

Two Main Package Styles Re-Pricing MOPRex Minimum Offer Price Rule

Re-Pricing Stage 1 Intersection of supply and demand sets the price Subsidized resource offers not adjusted Stage 2 Subsidized offers get “MOPR’ed” Clearing price is determined Units in between get no commitment

PJM Process Following the stakeholder process, no packages received a passing vote at senior committees PJM has committed to filing a proposal with FERC to address the issue PJM’s initial plan was to file both the re-pricing proposal and the MOPRex A recent order on an ISO-NE filing has helped clarify where FERC stands

ISO-NE: Competitive Auctions with Sponsored Policy Resources (CASPR) ISO-NE filed CASPR on January 8, 2018 All offers initially MOPR’ed Subsidized resources can buy a commitment from a retiring resource Retiring resource must retire FERC accepted CASPR on March 9, 2018 LaFleur concurrence, Powelson dissent, Glick both ISO-NE issue is not the same as PJM’s Subsidized new entry vs. subsidized legacy resources Commissioner opinions are split No concurrence/dissent from Chatterjee

Nothing for the upcoming capacity auction in May 2018 What’s Next? Nothing for the upcoming capacity auction in May 2018 PJM will make a filing to address the issue The content of the filing is still under discussion Price formation is currently being discussed by stakeholders