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

2. 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

3. PJM’s Role as a Regional Transmission Organization

4. PJM Markets

5. 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

6. 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

7. 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

8. 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)

9. 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

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

11. Potential Price Formation Enhancements2 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

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

13. 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

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

15. 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

16. Markets and Public Policy

17. 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

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

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

20. 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

21. 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

22. 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

23. 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