PJM Market Design: Industry Takes Action to Address Regulatory Dissonance

Today, the Energy Storage Association filed a complaint with the Federal Energy Regulatory Commission (FERC) seeking a review of PJM Interconnection’s prior unilateral changes to its market for frequency regulation. Electricity markets are founded on the principle that practices affecting rates won’t be changed arbitrarily, which ensures fair treatment of companies that invest in and operate electric resources. This is particularly important to ensure new resources like advanced energy storage enter markets and increase competition. For this reason, the decisions impacting tariffs that PJM has made must be submitted for review by FERC.

The PJM Interconnection is the world’s largest electricity market, covering 13 states and serving more than 65 million customers. PJM was the first market to use the near instantaneous response time and precisely controlled input and output of storage systems as a cost-effective tool to ensure short-term grid stability. PJM’s fast frequency regulation service (“RegD”) was designed for dynamic electric supply assets that are high-power, duration-limited, and fast-responding, matching the moment-to-moment deviations of supply and demand to maintain the frequency of the electric grid. In contrast, PJM’s conventional frequency regulation service (“RegA”) continued to enable the participation of traditional electric supply resources, which have slower response times and ramp rates but can sustain service indefinitely. RegA is typically performed by coal or natural gas power plants regulating or ramping their output and larger pumped-hydro storage facilities with dynamic controls.

As a result, more than 265 megawatts of advanced energy storage is currently deployed in PJM – nearly all of it competing in the regulation market. Energy storage systems have lowered costs and generated value for the millions of customers in PJM through RegD service by enabling more efficient dispatch of frequency regulation resources of all types, reducing the overall need for regulation service on the system.

Regulation Market Certainty & Unilateral Changes

Over the course of 2015, larger system conditions were leading PJM to call on its energy storage resources to sustain longer-duration service regularly. Because RegD service was designed to be short-duration, PJM decided to make changes to the frequency regulation market while convening a stakeholder consultation process. In late 2015, PJM artificially capped how much RegD service can be provided, and in early 2017, PJM changed the parameters of RegD service, including ending its use for only short-duration needs.

The changes to the parameters of RegD service undermine its original purpose – to provide efficient response to short-term deviations of system frequency (typically measured in minutes). Keeping the grid in balance over longer periods—up to an hour or more—is the role of energy markets, or in emergencies, reserves. In effect, PJM has decided to rely on regulation resources to correct prolonged system imbalances rather than address their root causes. Additionally, the parameters of RegD service also determine how market participants are compensated, and these changes constitute a substantive modification to the actual rates.

Typically, when changes of a magnitude that impact market structures and compensation are being considered, the market operator submits these changes to FERC for review and approval. This review is an important step and is a legal requirement because it ensures that our nation’s wholesale electricity markets remain fair and accessible and that capable assets of all types are rewarded for their performance.

That is why ESA has submitted a Section 206 filing with FERC: to review the decisions made by PJM and enable the changes to RegD service to be considered as a formal tariff change. Moreover, without such review, nothing stops PJM from making changes of similar magnitude again in the future—creating significant uncertainty for energy storage market participants.

It is important to note that PJM did undertake a stakeholder consultation process and discussed proposed changes with market participants. PJM staff were presented with proposals to address the broader system challenges that prompted a review of the frequency regulation market design, including proposals from the Energy Storage Association and its members, designed to meet PJM’s needs as the grid operator while enabling energy storage owners to adapt to new conditions.

After much discussion, these proposals from many different stakeholder groups were not put into place, and instead PJM decided to implement the rule changes opposed in our complaint –changes that have obstructed advanced energy storage system owners, operators, and developers, and substantively impacted the market tariffs and resulting compensation.

The Path Forward

We very much agree with PJM staff and other stakeholders that the rules and parameters applicable to RegD service can continue to be improved, and can also be adapted (or be a model for future markets) to address broader system challenges at PJM like over-generation and the need for more fast-responding, medium-duration reserves on the system. To date, PJM has done an effective job of addressing these challenges and has not seen any significant change to relevant system reliability metrics (e.g., CPS scores) since RegD service was implemented.

However, the root causes of system conditions that led PJM to seek longer-duration response from regulation resources in the first place have not been explored. In effect, PJM has sought to solve a larger system reliability issue through the regulation market. It is important that PJM staff investigate what appears to be a consistent over-supply issue that is leading to the prolonged system imbalances – and specifically calling on RegD resources to be continuously charging over extended periods of time.

Meanwhile, the continued transformation of the power sector away from sluggish baseload generation to more dynamic energy assets and distributed resources means that RegD changes need to be considered in the broader scope of PJM’s strategy and objectives. Robust and competitive markets for balancing and ancillary services are important in all energy markets, allowing the system to operate more efficiently, increasing system reliability, and saving the grid operator money, which gets passed on to consumers. 

Further review by FERC will ensure that the broader influences of these changes on market tariffs and performance are considered holistically, and that PJM will continue to be a leading innovator in creating the model for competitive energy marketplaces. We look forward to working with PJM staff, regulators, and a broader group of grid stakeholders on developing a better strategy for ancillary services and applications for energy storage, and by undergoing a more formal process, we can ensure that PJM customers don’t miss out on the ultimate objective – affordable and reliable energy, from increasingly sustainable sources.