PJM Paper Calls For "Immediate" Reforms To Virtual Bidding
October 13,2015
PJM issued a report on virtual transactions which recommends "immediate" reforms to rules to address financial trading in certain circumstances and under certain conditions.
PJM’s proposals would align eligible trading points for increment offers and decrement bids with the locations where physical generation, load and interchange transactions are settled in addition to trading hubs, and, change the biddable locations for UTCs [up-to-congestion transactions] to active generation buses as sources, trading hubs, load zones and interfaces.
More specifically, PJM proposes to align the eligible trading points for INCs and DECs with nodes where either generation, load or interchange transactions are settled, or at trading hubs. This would include generator buses where active generators exist, load buses where load is settled nodally, load zones, interfaces and trading hubs.
The intent of this change is to better align the use of INCs and DECs with the physical nature of the Real-Time Market while preserving the ability for such instruments to be used at trading hubs to facilitate longer-term hedges.
Under today’s rules, INCs and DECs can be placed at nodes where there is no other settlement such as individual load buses. While these types of transactions may be profitable based on differences between the Day-Ahead and Real-Time Markets, they can result in transmission flows and load distributions that are inconsistent with physical reality of the system and potentially result in resource commitments in the Day-Ahead Market that do not align with the system needs in real-time. They may aide in price convergence at the specific node, but it is at a location where there is no other settlement and therefore no real change in the incentives to other market participants, the report said
For the same reasons, PJM would alter the biddable locations for UTCs to generation buses as sources only, trading hubs, load zones and interfaces
PJM also believes that the available bidding nodes for UTCs should be changed. In addition to hubs, zones and interfaces, PJM also proposes to allow generator buses as biddable UTC points but only as the source point of the transaction. Permitting UTCs at interfaces, hubs and zones is intended to continue to permit UTC trading but remove their ability to be used in ways that do not lead to market efficiency. Because these activities are typically enacted nodally, removing individual nodes will remove much of this ability. Notwithstanding the foregoing, PJM does propose to permit UTCs to be submitted with active generation buses as the source point only. This change is proposed to allow market participants trying to hedge generation or load against real-time congestion a method to do that.
Additionally, PJM proposes leveling the allocation of uplift across virtual transactions by allocating uplift to a UTC transaction in a manner that is consistent with increment offers and decrement bids.
PJM proposes to allocate uplift to UTCs consistent with INC and DEC transactions. Currently, UTCs do not face a similar uplift charge as INCs and DECs, which has led to a significantly greater volume of UTCs as compared to INCs and DECs
"PJM believes the allocation of uplift to UTCs is a critical market design change that must be made to remove the competitive advantage afforded to UTCs today," PJM said
Currently, PJM has insufficient information to warrant further changes beyond those called for in this paper, which are common-sense reforms. Further analysis to support a shared consensus for change is warranted before departing from or qualifying long-standing principles and academic and theoretical assumptions which support financial transactions as valuable hedging, convergence and liquidity tools, the report says