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NatGas Facing Stiffer Competition Under PJM Reform Proposal

PJM Interconnection this week unveiled a proposal to reform wholesale electricity pricing that it claims would better reflect the “true costs” of producing power and keep its system more reliable by solidifying revenues for faltering baseload nuclear and coal generators that have been undermined by low natural gas prices.

Wholesale prices have fallen as more low-cost renewable sources, such as wind and solar, penetrate the system, necessitating flexible plants like natural gas-fired facilities to serve as capacity backup. Low-cost gas also continues to knock aging coal-fired plants off the generation stack and higher-cost nuclear facilities remain threatened.

PJM has recommended an enhancement to its locational marginal pricing (LMP) method that would allow the inflexible units it schedules to set price under certain circumstances to better recover costs. Gas-fired facilities can power up more quickly than less flexible coal and nuclear units, which are unable to increase/decrease their output within a specified period and are currently not eligible to set price. 

In 2005, coal and nuclear resources generated 91% of electricity on the PJM system. Over time, the mix has become more evenly balanced. From 2010 to 2016, PJM’s system was 33% coal, 33% gas, 18% nuclear and 6% renewables, including hydro. It acknowledged in a study released earlier this year that the system could add more gas and renewables without becoming over-reliant on those resources.

In a 53-page white paper, PJM laid out the complexity of the proposal, which it argues would stoke more competition by enabling all scheduled units to set energy market prices. The enhanced pricing method, PJM said, would help to make the grid more reliable and flexible. In its analysis, however, PJM found that changing the LMP method would result in a 2-5% increase in wholesale electricity prices.

The changing resource mix and technology shifts of recent years have sparked a debate over how to value electricity and fairly compensate those that generate it. In September, the U.S. Department of Energy submitted a notice of proposed rulemaking (NOPR) to the Federal Energy Regulatory Commission to implement reforms that favor baseload coal and nuclear facilities by guaranteeing cost recovery.

PJM serves 65 million people in all or parts of 13 states and Washington, DC, where it operates the region’s transmission grid. PJM’s Stu Bresler, senior vice president of operations, said the proposal was not crafted in response to the NOPR. He called a “resource-agnostic” plan that would keep the system more reliable and flexible.

“We feel very strongly that market-based approaches to reliability and resilience are the best approaches,” Bresler said. “They achieve those goals in the most efficient manner...We don’t believe that we have the problem that seems to be being addressed by the DOE NOPR. There is always room for improvement, and we do think we have an issue that needs to be addressed  and that is in the form of energy market price formation.”

Critics of the DOE proposal fear it could upend the competitive wholesale power markets by  propping up coal and nuclear at the expense of renewable and natural gas resources. 

PJM’s proposal also is designed to enhance shortage pricing by aligning it with how resources enhance reliability.

“An effective shortage pricing mechanism rewards resources that are supplying energy and other essential grid services during emergency conditions and, therefore, minimizes their reliance on the capacity market for revenue sufficiency,” the white paper said. “In order to avoid an over-reliance on the capacity market for revenue sufficiency, it is imperative that an effective shortage pricing mechanism be in place even with the existence of a capacity market.”

PJM’s research “predates” the DOE NOPR, Bresler said. The company plans to discuss its proposal with members, regulators and other stakeholders.

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