Recent PJM Report Possible Precursor to Higher Prices

           US - Energy News

Over the last several years, wholesale electricity prices in the Eastern Interconnect have generally been declining. There was a price rally during the Polar Vortex in the winter of 2014, but it was short-lived.

Currently, prices for wholesale electricity are at or near their lowest levels since the Eastern Interconnect Independent System Operators (PJM, NY-ISO, NE-ISO) adopted Locational Marginal Pricing (LMP) in the first few years of the 2000s. That said, a PJM report/study released in June may be indicative of an event/process that could lead to higher power prices in the future. The study endeavors to create a dialogue on the following two issues.

1. Pricing Reform: Refining locational marginal price (LMP) formation to recognize the contribution of all resources, including large, inflexible units in serving load in a particular interval.

2. Impacts of Negative Offers: Addressing the pernicious effect that negative offers may have hastened the premature retirement of economic thermal generation, whose continuing operation is needed to meet capacity requirements and provide reliability services to accommodate the intermittency of renewable generation.

Before examining the report in further detail, it makes sense to review the backdrop to the current low prices. There are numerous macroeconomic and technological reasons contributing to these low prices. On the economic side, the financial crisis of 2007-2009 had an extremely negative impact on power demand. Concurrently, technological advances in horizontal fracturing (fracking) has transformed the natural gas industry and dramatically increased domestic natural gas production. This glut of cheaper natural gas has transformed the power industry as natural gas used as fuel for power generation has become increasingly economical. Just as important, this same period has seen the steady growth of renewable electricity (primarily wind and solar) generation added to the grid.

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