PJM over-forecasting costs consumers up to $4.4B for unneeded energy capacity: Report

Source: By Iulia Gheorghiu, Utility Dive • Posted: Tuesday, March 17, 2020

  • Customers pay as much as $4.4 billion a year for unneeded energy in the PJM Interconnection, according to a new report published on Monday.
  • The grid operator overestimated how much power it needs for more than a decade, according to an independent economic analysis created on behalf of the Sierra Club and the Natural Resources Defense Council. PJM’s reliability pricing model “results in commitments that are roughly 10% of peak load or more in excess” of the operator’s target reserve margin, resulting in over 15 GW of excess capacity in recent years, according to the study.
  • Forecasting accuracy has greatly improved after implementing changes in 2016 to “account for energy efficiency, distributed solar generation and other factors,” PJM spokesperson Jeff Shields said.

Dive Insight:

PJM has a target reserve margin of about 16% of peak load for the past decade, showing the grid operator has consistently believed that level of capacity is needed to ensure reliability. However, throughout that period, excess energy has continued to clear reserve margins, according to the final load forecasts of auctions from 2012/2013 to 2020/2021.

PJM auctions consistently led to excess capacity as much as 13.6% above the grid operator’s reserve margin. Permission granted by Sierra Club, NRDC

The overforecasting figures analyzed by the report are in track with analysis by the PJM market monitor, Monitoring Analytics. In the latest state of the market report, the group estimates PJM will have more than 14,000 MW of excess reserves above the required reserve margin.

The market monitor has often noted over-forecasting, including in a recent report where “PJM’s over forecasting led to inflated capacity market prices in the last auction,” Joe Bowring, president of Monitoring Analytics, told Utility Dive via email.

The capacity needed for the PJM region, which encompasses 13 states and Washington DC, is developed through an independent consultant, PJM’s Shields said. The consultant considers “similar arguments raised in the [Sierra Club/NRDC] report before it approved the best course to maintain resource adequacy,” he said.

PJM’s director of resource adequacy planning, Tom Falin, previously told S&P Global Market Intelligence that the grid operator had “a history of over-forecasting.”

Per the new report, as much as 18.7 GW of excess energy cleared a PJM auction. By doing the capacity market auction three years ahead, subsequent auctions allow the market to correct overpurchases. But the report states that the auctions don’t do enough to correct the excessive quantities of capacity at excessive prices and that overprocurement is not sufficiently managed in PJM.​

“We appreciate this type of detailed stakeholder input and PJM will continue to work with all sectors of the market and the states we serve to successfully maintain reliability at the least cost,” Shields said.

The analysis does not include the impact of the minimum offer price rule (MOPR) implementation, based on new rules passed by federal regulators in December to exclude state-subsidized resources from capacity markets. Overprocurement is expected to increase under MOPR, according to the report.

To the consternation of generators in the region, PJM’s forward capacity market auction has been delayed since May 2019. The grid operator is expected to file by Wednesday to develop new values based on the FERC orders, including the cost of construction of new power plants, which is one of the four aspects of PJM’s calculation that the report blames for over-forecasting.