Power Generation, Transmission, and Use

Markets, Regulation, and Oversight

Impacts of Power Generation and Transmission

Looking Ahead


CEIR Report Map


Maryland Power Plants and the Environment (CEIR-18)

3.1.1 Wholesale Energy Pricing

PJM uses a uniform price auction based upon locational marginal prices (LMPs), which vary across PJM zones and time of day, to establish energy prices. Electricity generators bid in the amount of energy they would like to sell at a particular time and price.

PJM administers and operates two wholesale energy markets—the day-ahead market and the real-time market. As implied by the names of the markets, the day-ahead market clears a day in advance of actual usage, that is, sellers commit supplies to PJM and purchasers commit to purchase the supply based on expected loads. The real-time market is typically used as a balancing market for loads and generation in real time but can also be relied upon to meet full load requirements. Together, these markets are referred to as the “spot” energy market. In addition to the spot energy market administered and operated by PJM, there are also bilateral transactions for energy between a particular buyer and seller, with prices largely determined by the “forward” markets, where sellers offer to provide, and buyers offer to purchase, specific quantities of energy (e.g., 50 MWh) over a defined period of time (e.g., each hour of the month). Forward markets extend several years into the future.

For energy products on the day-ahead market, the PJM operator determines the sub-hourly dispatch of plants on the basis of price bids submitted by suppliers. Energy prices in PJM are based upon the bids designating a price and quantity at which a generator is willing to sell electricity. PJM stacks these bids from lowest price to highest price until it is able to satisfy the quantity required to meet energy requirements in its footprint. It is the price of the last resource called upon—the marginal price—that becomes the PJM-wide energy component of the hourly, day-ahead LMP. Energy prices may vary considerably by location due primarily to transmission congestion. The average PJM region day-ahead and real-time LMPs for 2015 are shown in Table 3-1.

Table 3-1 PJM Off-Peak and On-Peak Hourly Locational Marginal Prices for 2015

  Day Ahead Real Time
Average 28.11 40.97 28.08 39.44
Median 24.51 33.69 23.62 29.95

Source: Monitoring Analytics, 2015 State of the Market Report for PJM, March 10, 2016.

PJM must also account for congestion costs. Congestion occurs between two delivery points on the transmission system when the transmission grid cannot accommodate the power flows between these specific locations. When congestion occurs, higher-priced local resources are used instead of lower-cost electricity that would otherwise be used to meet load by being transported into the area via transmission lines. During periods of congestion, PJM must dispatch generation resources that are located at or near the load zone even if those resources are not the most economic resources that would otherwise be available to meet load. The cost of congestion refers to the incremental cost of dispatching these more expensive location-specific resources.

Congestion most often occurs during times of high demand, when transmission lines are reaching full capacity and certain sections become constrained. LMP differentials between PJM regions (see Table 3-2) have been mainly due to congestion between the western region, where abundant low-cost generation is located, and the Mid-Atlantic region, where the large load centers are located. PJM estimates that in 2015, congestion added approximately $8.69/MWh to the average LMPs in the BGE zone, $5.35/MWh in the Pepco zone, and $3.38/MWh in the Delmarva Power & Light (DPL) zone based on real-time market outcomes. Congestion accounted for 18 percent, 12 percent, and 8 percent of load-weighted, average, real-time LMPs in the BGE, Pepco, and DPL zones, respectively.

Table 3-2 Real-time Average Annual Load-weighted Locational Marginal Prices ($/MWh)

PJM Zone 2014 2015
BGE 67.78 47.22
Pepco 65.61 43.04
DPL 65.03 42.27
APS 52.94 38.04
ComEd 42.04 29.85

Source: Monitoring Analytics, 2015 State of the Market Report for PJM, March 10, 2016.

Congestion costs and LMPs have dropped in the last few years and the differences in LMPs between the eastern and western zones of PJM have declined. This can be attributed to low natural gas prices, continuing transmission system improvements, and to an overall reduction in peak demand resulting in fewer instances where transmission capacity constrains energy supply transfers.

The biggest contributor to LMPs is the cost of fuel to generators. With natural gas prices declining to multi-year lows, and energy demand lower than usual due to reduced economic activity and relatively mild weather, LMPs in 2015 remained at lower-than-average levels throughout the year. The factors that affect LMPs are discussed at length in Appendix B.

Historically, coal plants were the least-cost generators due to the long-term availability of low-cost coal as a fuel, as well as the economies of scale arising from the construction of large, baseload coal plants. However, over the last several years natural gas has increasingly been used in place of coal for baseload generation. Shale gas discoveries in the United States have increased natural gas supplies, which in turn have led to sharp decreases in wholesale natural gas prices. The decrease in wholesale prices has trickled down into reductions in wholesale electricity price and, subsequently, retail electricity prices. These conditions are expected to continue since natural gas supplies are plentiful and wholesale natural gas prices are expected to remain low for the next decade. As a result of lower wholesale electricity prices coupled with other factors, such as stricter environmental regulations for fossil-fuel plants and the aging of the coal fleet, some companies have opted to either retire older, less efficient coal plants or convert them to fire natural gas. PJM’s Market Monitor reports that approximately 23,700 MW of coal, oil, and older natural gas plants have retired within the PJM footprint between the beginning of 2011 and the end of 2015, with another approximately 3,300 MW expected to retire by the end of 2020. PJM does not expect these retirements to result in degraded reliability since there is currently excess generating capacity in PJM.