FERC Approves Plan to Reduce Winter Price Volatility

by | Jun 17, 2015

During the Polar Vortex that took place in early 2014, electricity prices spiked across the Northeast and Midwest as a result of insufficient natural gas supplies to meet an increasingly gas-dependent power generation fleet. PJM, the regional transmission organization that operates the market spanning much of the affected area, describes how the event saw 22 percent of power generation capacity (40,000 MW) across the region unable to operate due to regional gas shortages, as utilities pumped massive quantities of gas to customers to meet heating needs.

Retail Energy Buyer reported last month that customers had to pay an estimated $600 million in additional charges to meet demand when they were already paying power generators to make that capacity available. PJM did not punish non-performing generators, to the chagrin of some stakeholders.

Capacity Performance Proposal

In December 2014, PJM filed a “Capacity Performance Proposal” with the Federal Energy Regulatory Commission (FERC) to address this issue and ensure that going forward all capacity that bids into the market will actually be available when needed. Last week, FERC approved the proposal. This means the proposal will be in effect when PJM opens its next regional capacity auction on August 10 for the 2018-2019 delivery year.

RTO Insider presents a more detailed analysis of the plan, and how it varies from a similar plan instituted by the Independent System Operator of New England to deal with winter gas shortages.

Implications for Retail Buyers

The plan provides greater incentives for capacity providers to ensure that their power plants can actually operate and serve customers as promised under contract. PJM administrators believe this will mitigate winter price spikes and improve reliability.

How this will affect prices in the region is unclear. On the one hand, the region is, PJM suggests, less likely to see severe short-term power spikes. On the other hand, customers will be paying more to ensure that the capacity is available. It will be valuable for customers to monitor price trends in the coming weeks, and to see how both wholesale and retail prices are affected by the August capacity auction. The price charts that the Energy Research Council provides to Retail Energy Buyer on a weekly basis should help customers in PJM states to monitor these trends, determine how the market is reacting, and plan their procurement strategies accordingly.

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