High-cost gas-fired generators will be able to set PJM market clearing prices above $1,000/MWh for the remainder of the winter, the Federal Energy Regulatory Commission ruled.
The commission granted PJM’s request for a waiver of PJM’s $1,000 offer cap through March 31, setting the stage for a contentious stakeholder debate over the long-term fate of the cap.
FERC’s order (ER14-1145) came over the objections of consumer advocates, state regulators and others, who said allowing the RTO’s most inefficient generators to set clearing prices would provide a windfall to the vast majority of generators with costs well below $1,000.
The commission sided with PJM and generators, who said the high prices should be reflected in clearing prices to provide signals for new entrants and allow market participants to hedge their risks. (See Price Cap Ruling Could Reverberate for Years.)
The order supersedes the commission’s Jan. 24 ruling (ER14-1144) allowing make-whole payments for generators with operating costs above the cap. That order allowed PJM to fund the make-whole payments through uplift charges, which cannot be hedged.
“By paying an uplift, PJM is in effect paying one price for energy dispatched through the market (e.g. $1,000), and a second higher price (e.g. $1,200) for the resource dispatched out-of-merit (while treating the latter in the dispatch stack as if it had a bid of $1,000),” the commission ruled. “This would not be consistent with longstanding Commission precedent. The Commission has previously found that `[p]ayments made only to individual resources and recovered in uplift fail to send clear market signals’ and that those resource costs `should be reflected in transparent market prices whenever possible.’”
PJM said the $1,000 cap was five to seven times higher than the marginal cost of production when the commission approved it as a market power mitigation measure.
“We did not anticipate that, when the $1,000/MWh bid cap was adopted, it would prevent marginal cost bidding,” the commission said. “Presently, however, the $1,000/MWh bid cap is preventing competitive marginal cost bids and resulting competitive prices that are needed to balance supply and demand.”
The commission dismissed concerns that lifting the cap would allow gaming, noting that generators will have to provide proof of their costs to the Independent Market Monitor. It ordered the Monitor to file a report by the end of April identifying the number of hours when clearing prices exceed $1,000, the resulting prices and total energy costs.
In addition, FERC’s enforcement staff will be monitoring the market for instances of market manipulation, the commissioners said.
The ruling will have no practical impact if natural gas prices remain at normal levels for the remainder of the winter. But if another cold snap sends prices above $100/mmBtu — as it did at some locations servicing PJM generators in January — costs to load could increase dramatically, if briefly.
FERC rejected calls that it lift the $1,000 price cap in the neighboring NYISO, which asked FERC for the more limited relief of make-whole payments funded through uplift (ER14-1138). A $1,000 cap also remains in place for MISO.
“The NYISO order is distinguished from the instant case because NYISO did not request that the marginal costs be reflected in clearing prices,” the commission said.
