FERC eases price cap in PJM amid unprecedented gas price spikes

Source: Hannah Northey, E&E reporter • Posted: Tuesday, January 28, 2014

Federal regulators on Friday permitted grid operators in the Midwest and mid-Atlantic to temporarily allow generators to exceed a $1,000-per-megawatt-hour price cap on power from gas-fired power plants, citing unprecedented gas price spikes.

The Federal Energy Regulatory Commission granted PJM Interconnection’s request to waive the cap through March 31 in response to “unprecedented spikes in fuel costs caused by recurring extreme cold weather events.” PJM had initially told market participants it would ask for a waiver through March 1.

FERC is also allowing PJM, the power grid operator for 13 Eastern states, to compensate generators to cover the difference between the cost of producing power and the energy market clearing price. “We find that the waiver is necessary to address the reliability concerns posed by the sustained extreme weather currently being experienced in the PJM Region and maintain confidence in market operations,” FERC wrote.

PJM’s rules require that generators that commit to supply power must bid their plant’s output into the regional electricity market. Prices are generally expected to reflect generators’ costs, with the lowest bids winning the right to supply the required power each hour.

Last week, gas prices soared and pushed the cost of producing electricity beyond the $1,000-per-MWh limit on bids that PJM created to protect consumers. The record-high gas prices were clustered along the Interstate 95 corridor into New York City. PJM said in its filing to FERC that gas prices at two key city gates averaged more than $120 per million British thermal units and included prices up to $140 per MMBtu, which the grid operator said were “unprecedented” for the region.

Those high gas prices translated into extremely high costs of operation for simple-cycle combustion turbine generators that paid about $1,200 per MWh to produce the electricity. PJM said it saw signs that 5,000 megawatts of energy market offers in the day-ahead market were above the cap, with bids at a price of $999 per MWh.

The situation, PJM said, could result in generators not being available when they’re needed most.

Grid operators in New York have asked for a similar easing of their price cap by Jan. 31, and comments on that proposal are due by Jan. 29, according to FERC.

New York, New England and other mid-Atlantic states have been increasingly scrutinized as grids there become more dependent on natural gas. The region is at the end of major interstate natural gas pipelines, which makes it vulnerable to price spikes when gas supplies are strained. New England also receives gas supplies from Canada and a Boston-area liquefied natural gas terminal.

The recent price spikes have also highlighted ongoing concern with the way gas is secured among different market participants.

Between 80 and 90 percent of the gas-fired power plants in PJM reserve gas supplies in advance through “non-firm” contracts, according to the North American Electric Reliability Corp.’s winter supply assessment.

Utilities that provide heating for homes and businesses, on the other hand, purchase “firm” contracts because they cannot afford to run short. And when temperatures drop, customers with “firm” capacity have priority access to gas supplies. New England gas-fired generators, on the tail end of major interstate pipelines, are most threatened if heating customers draw down available gas supplies.

PJM Vice President Craig Glazer has said that the issue was one of price, not gas supplies, and that it remains unclear why prices ros