Customer value is a key factor in any smart grid business case. But not all customers are created equal. In particular, commercial and industrial (C&I) customers have greatly different needs,...
Pondering PJM's Energy Price Run-Up
Does inappropriate market power explain the increase during late 2005?
margin when natural gas is indicated as the marginal fuel. If it is the wee hours of the morning, a shoulder month, or a relatively light load hour, a combined-cycle CT (7,500 Btu/kWh) was assumed to be running on the margin. The important feature of the study is that the heat-rate assignment rules are held constant during the 24-month study period. This means that the pattern of the results is interesting, not necessarily the excess or deficit in any particular month.
Given these caveats, the results as shown in Figure 2 indicate that beginning in July (not June, curiously) 2005 and lasting through November, actual DA LMP began to exceed its estimate by about $15/MWh more than had been evident during the preceding 14-month period. Prices in December exceeded their estimate by an incremental $27/MWh versus the first 18 months of the study. Note the words “more” and “incremental,” which make clear that, due to this analysis’ admitted deficiencies, we cannot be certain of the absolute level of the difference between DA LMP and its estimate. Rather, the interesting finding of the study is the change in the pattern beginning in July 2005.
What is the import of these results? First, if an additional $27/MWh were generated in the PJM energy market in December 2005 and found its way into the hands of generators, this would provide an additional $1.7 billion in just that one month alone. The $15/MWh overage in July through November represents another $4.7 billion. This, plus the December overage of $1.7 billion, yields an “extra” $6.4 billion to generators during the last half of 2005. This works out to about $40/kW for each of PJM’s approximately 160,000 MW of generation capacity.
Econometric Analysis: A Peculiar Correlation
Figure 3 contains the daily difference between actual DA LMP and estimated LMP over the two-year period. The difference is defined as actual DA LMP minus estimated DA LMP.
The daily results again show that, beginning in July 2005, actual DA LMP begins to exceed estimated LMP in a rather extraordinary way, at least as compared with the first 18 months of the time period.
We constructed an econometric model that attempts to explain the variability in this difference over the study period. As might be expected, preliminary results show that the difference between actual DA LMP and estimated DA LMP is positively related to the level of DA LMP itself. An interesting future project would be to construct a more sophisticated model to see how this difference (actual LMP minus estimated LMP) through time relates to fuel prices, season of year, time of day, PJM geographic configuration, marginal fuel, loads, generator outages, or other variables. 7
What to make of all of this? The PJM MMU’s State of the Market Report for 2004 found that most PJM energy, capacity, and ancillary services markets were competitive in 2004. 8 The MMU makes a similar finding for 2005, specifically finding that energy market results were competitive. The 2004 report notes:
“Market structure issues in the PJM Energy Markets have been offset to date