Over the last few years, low power prices combined with a proliferation of subsidized renewable electricity resources have slowly been creating price distortions in the auction process for the organized electricity markets.
Since many of our customers are in the PJM footprint, we are going to discuss the specific issues to that market, but the same concepts exist in other organized power markets. As we point out in our second power article above, many states have legislated subsidies to support nuclear generating facilities, causing problems with the capacity market. This, however, is not the only price distortion, and we would like to discuss some of the other problems these subsidies are causing.
Illinois enacted legislation in 2016 that provided support to the Braidwood, Byron, Dresden, LaSalle, and Quad Cities nuclear units. The program started in June 2017, and all business consumers have been charged an average $.00193 per kWh/$1.93 per MWh for all of their consumption to pay for the program. While the fee is paid as a line item [Zero Emission Credit (ZECS)] on the distribution portion of the bill, in a market where the wholesale price has averaged $.027 per KWh/$27.00 per MWh for the time frame we have had zero emissions credits, the extra fee adds 7% to the customers’ energy cost. In New Jersey, legislation in May 2018 created a ZECS market for the Hope Creek and Salem nuclear generating facilities. The proposed ZECS charge is .004 cents per kWh/$4.00 per MWh. With a 12-month forward price of $27.25 per MWh for the PJM/PSEG zone, the effective price becomes $31.25 per MWh, an increase of 14.81%.
Nuclear and renewable electricity generation subsidies have created problems in the energy market for PJM, causing prices to clear at lower prices than they would normally. The PJM market is an electricity auction market and the goal is to allocate generation resources in the most efficient manner. With the introduction of units that are subsidized, some of the units offer themselves into the pool at lower prices then they normally would. Further, with many of the renewable resources being intermittent, some units are often called to run in what is called out of merit and paid uplift. These generators are not paid the clearing price at the time but a price that covers all of their costs. The argument to do this is that it improves pool performance, but many other generators feel as though they are not being compensated fairly as the clearing price stays artificially low.
Uplift is defined by the PJM Market Monitor as follows:
“Energy uplift is paid to market participants under specified conditions in order to ensure that resources are not required to operate for the PJM system at a loss. Referred to in PJM as operating reserve credits, lost opportunity cost credits, reactive services credits, synchronous condensing credits, or black start services credits, these payments are intended to be one of the incentives to generation owners to offer their energy to the PJM energy market for dispatch based on short run marginal costs and to operate their units at the direction of PJM dispatchers. These credits are paid by PJM market participants as operating reserve charges, reactive services charges, synchronous condensing charges or black start services charges.” The charges highlighted in bold are included in all retail energy contracts. It’s just not always highlighted well. Be assured, uplift does impact the final retail electricity price.
Since 2017, PJM has been exploring the issue of artificially low energy prices and has had an Energy Price Formation Committee since then. The goal has been to upgrade the rules in such a way that units that provide flexibility in a world of intermittent renewable electricity generation sources are compensated fairly. They have also proposed including starting costs in generators’ offers. This has not been a straightforward process with lots of deliberation with many competing interests. That said, PJM filed an updated market price formation with FERC in late March 2019. It is expected that the proposal if enacted as proposed would boost prices in the day-ahead and real-time market by more effectively valuing the flexibility of fast-responding units. PJM is seeking a ruling by December 15, 2019 with an implementation date of June 1, 2020. While expectations of approval have not been reflected in most PJM forward curves, it is an upside price risk for electricity consumers in PJM.
Analyst – David Mousseau
Source – PJM, CME, Utility Dive, PJM Market Monitor