PJM, which operates the electric grid for Pennsylvania and 12 other states, on Thursday defended a plan to change its rules so that coal, nuclear and some other generators can build their costs into the market price of electricity.
The proposal, in a paper published Wednesday, would result in a net increase in retail power prices of 2 to 5 percent and would give the coal and nuclear plants, some of which are scheduled for retirement, the opportunity to pass their costs to consumers, PJM said.
PJM, whose system serves some 65 million people, said the change would enable all generators contributing to its grid to compete to set energy market prices, and that customers would benefit from more market transparency and better operational efficiency.
But critics said the plan interferes with market forces that would eventually force the closure of coal and nuclear plants that can’t build their costs into PJM’s pricing structure, and is not justified by any concerns about maintaining reliability.
Rob Altenburg, director of the Energy Center at the environmental group PennFuture, said the abundant and growing supply of natural gas-fired power generation in Pennsylvania will replace the aging coal and nuclear plants when they retire, indicating that there’s no issue over maintaining grid reliability.
The proposed pricing reform represents a distortion to the market, without which the older inflexible plants would simply be retired, he said.
“What is the pressing need to give this segment of plants above-market pricing?” Altenburg asked.
If the plan is accepted, energy bills will go up to build the revenue of plants that should be phased out, he said. “This is an increase in costs to consumers that is going to make coal and nuclear plants raise their revenue.”
The plan, if approved by the Federal Energy Regulatory Commission, would represent a change to PJM’s structure, which does not allow the costs borne by so-called inflexible generating units – those such as coal and nuclear that are unable to respond to changing power demand in a matter of minutes – to be built into the “clearing price” — at which the quantity of electricity supplied equals the quantity demanded.
Adam Keech, PJM’s executive director of market operations, said the plan aims to set a clearing price that reflects all the units that are operating, not just those that meet the current rules.
In October, PJM opposed a plan by the Department of Energy to improve grid reliability by having utilities in the mid-Atlantic region compensate coal and nuclear plants that keep a 90-day stock of fuel. The grid operator said the DOE plan, which has been submitted to FERC, would undermine the open market.
The current exclusion of an inflexible generator’s operating costs from the pricing rules helps to explain the fact that power prices are at their lowest point in more than a decade, Keech said. Plentiful generation from growing supplies of natural gas and renewable fuels also drove the price below $30 a megawatt hour in 2016.
“Today, the market clearing prices don’t capture the fact that we operate that unit, and as a result, the clearing prices get suppressed,” Keech said in an interview.
Low prices in themselves are no bad thing, Keech said, but they are exposing the flaws in how PJM sets its prices.
Generators that can’t reflect their costs in the market price get “made whole” by PJM, and that’s a problem because it is non-transparent and distorts market incentives, he said. “These additional payments to make these generators whole when they can’t set the clearing price creates all kinds of bad effects in the market, and we want to minimize that.”
For electric ratepayers, the PJM plan appears to be a source of concern, but its details will become clearer during the upcoming stakeholder process, said Tanya McCloskey, Acting Consumer Advocate for Pennsylvania.
“We have concerns with the PJM price proposal, and what we’d really like to see happen is for it to go through the stakeholder process,” McCloskey said. “That’s where we can do the type of analysis and discussion that we need to do on the proposal.”
PJM’s Keech said the plan will be formally filed with FERC after the stakeholder process is complete in coming months.