PJM scarcity pricing plan worries midwest grid

OREANDA-NEWS. February 18, 2015. The two largest US wholesale power grids for years have had to tackle inefficient power transfers, and the mismatch in their market structures will increase further once the PJM Interconnection goes forward with its reserve scarcity pricing plan, Midcontinent Independent System Operator (MISO) senior officials said.

"When you see us bumping against each other at the seams, that is really two regulatory models," MISO executive vice president of transmission and technology Clair Moeller said today at a briefing at the National Association of Regulatory Utility Commissioners winter meeting in Washington, DC. "Our regulatory model looks very different from PJM's," he added.

PJM is the largest US power market, stretching from North Carolina to northern Illinois. MISO's market area includes 15 states from the US-Canadian border to the Gulf coast. PJM territory includes three enclaves within MISO in Michigan, Indiana and northern Illinois.

The differences extend to capacity and energy markets. PJM runs a centralized, three-year-forward capacity market while the capacity market in MISO is bilateral and dominated by longer-term power purchasing agreements by state-regulated utilities.

Neither regional transmission organization is likely to change its capacity market structure soon. But market participants and federal energy regulators are urging MISO and PJM to look at core issues in energy markets that obstruct power transfers across their borders.

The direction of flow between the two grids was not correlated with price differentials in half of scheduling intervals in 2013-14, meaning electricity exchanged between MISO and PJM was flowing from higher-priced into lower-priced areas.

Power exchanges during scarcity conditions contribute heavily to the pricing inefficiencies at seams, MISO said. Power within MISO is dispatched in five-minute increments while exchanges with PJM are scheduled in 15-minute cycles. "These time differentials will not matter except in times of scarcity," Moeller said.

The schedule mismatch means that during scarcity events gigawatts of flows "could be running after the last price signal that is not there any more," MISO general counsel Steve Kozey said.

PJM's recent proposal to change its reserve scarcity pricing method complicates problems, Moeller said. The Federal Energy Regulatory Commission is reviewing that proposal to create another tier of operating reserves and penalty factors and should increase the maximum price limit in PJM real-time markets to \\$3,000/MWh after 1 June.

PJM justifies its proposal by the need to cut uplift payments to generators and to ensure that high costs of reserves are reflected in market prices.

MISO is trying to adjust its reserve shortage pricing scheme to address the paradox of seeing wholesale power prices plummet during emergency conditions when load rises and operating reserves drop, but the outcome will not yield maximum prices as high as those in PJM.

Federal energy regulators in January told the two grid operators to step up efforts to fix seams problems, threatening to impose a fixed deadline.

The grids are making progress on coordinated transaction scheduling but it will take time to address all issues, Moeller said.