PJM is one of seven Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) responsible for running the high voltage electric transmission grid in North America. To learn more about what PJM does, read this blog, which provides a PJM market overview.
We recently covered what PJM and what it does in a previous blog post. In this new post, we’ll now help you understand the PJM capacity markets, which ensure the reliability and stability of the grid.
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PJM capacity market explained: Reliability Pricing Model
Capacity is like an insurance policy for the electric grid — adequate capacity means there’s enough electricity available to meet today’s and tomorrow’s demand, plus a reserve, as well as enough to meet the demand expected three years down the road.
PJM members must always maintain adequate capacity. This can be accomplished with their own generation resources, through customer demand response programs, and/or via the PJM capacity markets. To ensure the region’s near-term capacity needs, PJM offers members access to both a day-ahead and real-time energy market. Future capacity is handled through the capacity market PJM calls the Reliability Pricing Model (RPM).
The RPM is a competitive auction that matches power supply with demand. Most capacity is obtained during the first auction, known as the Base Residual Auction, which is held three years prior to the delivery year.
Simply put, RPM participants commit power supply resources to the market that will either reduce demand or increase available supply. For example, a utility could decrease its demand by completing energy efficiency upgrades or introducing demand response programs in which consumers are financially incentivized to reduce demand. Conversely, they could increase the region’s electricity supply by bringing new power generators online or upgrading existing generators.
By establishing long-term price signals, the RPM competitive market model encourages participants to invest in new generating resources and retire those that are less efficient.
Penalties for non-performance
RPM is what’s known as a “pay-for-performance” model in the capacity market PJM manages, which rewards utilities that perform above their commitment during emergencies, while levying stiff fines on those that don’t meet their commitments. Fines paid by the under-performers are used to pay bonuses to over-performers.
First enacted in 2017, PJM’s capacity performance rules were put to the test during Winter Storm Elliott, which left millions on the east coast without electricity in December 2022. While there were no power interruptions for customers in the PJM territory thanks to the implementation of multiple emergency procedures, PJM assessed nearly $2 billion in non-performance penalties on 81 of its members. Ultimately, the fees were negotiated down to around $1.25 billion, a total that was unopposed by the utilities involved.
Optimize your PJM capacity market participation
As shown in this PJM capacity market overview, the RPM plays an integral role in critical electricity markets and operations across PJM’s region. As such, market participants need an in-depth knowledge of its complex systems and their own generation resources.
PCI Energy Solutions provides optimized tools to help manage your organization’s participation in PJM’s capacity market. Learn more about how we can support your PJM engagement through superior analytics and timely insight into the key drivers of profitability.
