Infrastructure Past, Present, and Future Casebook/PJM Interconnection

Summary

The PJM Interconnection is a regional transmission organization (RTO), overseeing the operation of the power grid and wholesale electricity markets across the Mid-Atlantic and Midwest regions of the United States. Although it initially served the Pennsylvania-New Jersey-Maryland region, earning PJM its name, it provides energy to 13 states today. It falls under the purview of the Federal Energy Regulatory Commission (FERC), an independent regulatory agency under the Department of Energy. PJM stands as one of the largest and most intricate grid operators in North America.

Here's an overview of PJM:

Origins and Development: PJM can be traced back to its inception in the 1920s as the Pennsylvania-New Jersey Interconnection (PNI), established to coordinate power transmission among utilities in these states. Over time, it expanded its scope to include utilities from additional states, eventually evolving into the PJM Interconnection in the 1980s.

Independent System Operator (ISO): PJM attained the distinction of being the first ISO in the United States in 1997, thereby segregating grid operation and management from generation ownership. This approach fosters competition and efficiency within the wholesale electricity markets.

Wholesale Electricity Markets: PJM administers the world's largest wholesale electricity market, facilitating the trade of electricity among generators, transmission owners, and various market participants. These markets ensure the dependable and cost-effective provision of electricity to consumers.

Grid Administration: PJM oversees the management of the high-voltage transmission grid, guaranteeing the dependable and efficient transmission of electricity to millions of consumers within its jurisdiction. It coordinates transmission planning, maintenance, and operations to uphold grid reliability and stability.

Integration of Renewable Energy: PJM has taken a pioneering role in incorporating renewable energy sources like wind and solar into its grid. It has implemented market regulations and operational protocols to accommodate the intermittent nature of renewable generation while safeguarding grid reliability.

Challenges and Endeavors: PJM confronts a range of challenges, including evolving energy policies, technological advancements, and shifting market dynamics. It remains committed to addressing these challenges through initiatives such as market reforms, grid modernization efforts, and resilience planning.

In essence, PJM assumes a pivotal role in ensuring the dependable and efficient operation of the electric grid across a vast and diverse region. It facilitates competitive electricity markets while actively promoting the integration of clean and renewable energy resources.

Timeline

1927: The Federal Power Commission (FPC) authorized the formation of the Pennsylvania-New Jersey Interconnection (PNI), which later became PJM Interconnection.

1947: The PNI is officially formed as a voluntary association of Pennsylvania and New Jersey utilities to coordinate planning and operations.

1960s-1970s: The PNI expands its membership to include utilities from additional states, becoming the Pennsylvania-New Jersey-Maryland Interconnection (PJMI).

1980s: PJMI continues to grow, encompassing utilities from Delaware and the District of Columbia, and changes its name to PJM Interconnection.

1997: PJM becomes the first independent system operator (ISO) in the United States, separating grid operation and management from generation ownership.

2000s: PJM implements various market reforms and introduces competitive wholesale electricity markets to promote efficiency and reliability.

2001: FERC designates PJM as an RTO.

2002: PJM becomes the first fully functioning RTO in the United States.

2005: PJM launches the world's largest wholesale electricity market, encompassing a large portion of the eastern United States.

2010s: PJM continues to expand its footprint and enhance its grid management capabilities, integrating renewable energy resources and improving grid resilience.

2018: PJM initiates a stakeholder process to address challenges related to state-subsidized resources and their impact on competitive markets.

2020s: PJM faces ongoing challenges related to evolving energy policies, technological advancements, and changing market dynamics while striving to maintain grid reliability and affordability.

2024: PJM implements new market rules and operational procedures to address emerging challenges and ensure the efficient operation of the grid.

Funding and Financing

Understanding PJM Interconnection, one of the largest power grid operators in the United States, necessitates an examination of its distinct organizational structure, revenue sources, and financial systems. PJM maintains a wholesale power market that serves portions of 13 states and the District of Columbia, managing the transportation of wholesale electricity in its region.

Membership Dues: PJM is a membership-based organization whose principal source of revenue is its member utilities. These utilities pay membership fees based on their peak load and market participation. These dues support operating expenses such as system maintenance, market operations, and administrative charges.

Market Revenue: PJM runs a variety of wholesale electricity markets, including energy, capacity, and related services. It generates revenue from market players such as power generators and suppliers by charging market fees, transaction charges, and penalties. These revenues significantly contribute to PJM's financial sustainability by funding operations and grid infrastructure investments.

Transmission finances: PJM derives money from its transmission services. It charges transmission prices to customers of its transmission system, which includes generators, utilities, and other market players. The Federal Energy Regulatory Commission (FERC) regulates these tariffs, which are dependent on criteria such as transmission capacity utilization.

Grants and Federal Funding: PJM may be awarded grants and federal funds for specific initiatives aimed at improving grid dependability, resilience, and modernization. For example, federal entities such as the Department of Energy (DOE) and the Department of Homeland Security (DHS) may fund cybersecurity projects or grid enhancements. However, such funding typically accounts for a lesser fraction of PJM's total revenue than membership dues and market revenues.

Debt Financing: Similar to many large infrastructure corporations, PJM may use debt financing to fund capital investments in grid expansion, maintenance, and technology improvements. This could include issuing bonds or obtaining loans from financial organizations. Debt financing enables PJM to stretch the expense of big expenditures over time while using its steady revenue streams to fulfill debt commitments.

Investment Income: PJM may generate income by investing its financial reserves in interest-bearing instruments such as bonds, money market funds, or other low-risk assets. This investment income increases financial freedom and can augment incomes from other sources.

Institutional Arrangement - Oversight and Maintenance

Institutional Arrangements:

Regional Transmission Organization (RTO): PJM is an RTO that acts as an independent entity in charge of coordinating the functioning of the transmission grid and wholesale electricity markets within its jurisdiction. As an RTO, PJM is subject to a set of rules, protocols, and governance structures that assure fair and efficient market operations.

Stakeholder Governance: PJM's decision-making process includes input from a diverse group of stakeholders, including utilities, generators, consumers, and state regulators. This stakeholder governance model guarantees that multiple perspectives are taken into account when developing rules, laws, and market designs.

Regulatory Oversight: PJM is overseen by several regulatory organizations, including the Federal Energy Regulatory Commission (FERC) and state public utility commissioners. These regulatory bodies assess and approve PJM's tariffs, market rules, and other critical parts of its operations to ensure regulatory compliance and market efficiency.

Oversight:

Regulatory Oversight: The FERC and state PUCs monitor PJM's operations to maintain regulatory compliance and defend the interests of consumers and market participants. The FERC oversees wholesale electricity markets, while state PUCs are in charge of retail power markets and consumer protection.

Market Monitoring: The PJM has a market monitoring feature that detects and mitigates market manipulation, anticompetitive activity, and other inefficiencies. Market monitoring ensures the integrity and competitiveness of wholesale power markets within the PJM footprint.

Impartial Market Monitor (IMM): The PJM employs an Independent Market Monitor (IMM), who serves as an impartial watchdog over market operations and participant behavior. The IMM presents its findings and suggestions to PJM's stakeholders, FERC, and state regulatory bodies.

Maintenance:

system Operations: PJM is in charge of the transmission system's day-to-day operations, which include grid reliability monitoring, grid congestion management, and grid repair coordination. PJM's grid operators guarantee that the electric system operates reliably and securely, responding to real-time changes in supply and demand.

Infrastructure Investments: PJM is in charge of overseeing grid infrastructure investments that aim to maintain and improve the reliability and resilience of the transmission system. These expenditures include modifications to transmission lines, substations, and other grid infrastructure to handle shifts in power demand and generation patterns.

Market Design and Rules: PJM constantly examines and modifies its market design and rules to reflect changing market conditions, technology improvements, and regulatory needs. This constant maintenance ensures that the PJM wholesale power markets are efficient, competitive, and resilient to interruptions.

In summary, the PJM Interconnection's institutional arrangements, oversight mechanisms, and maintenance practices are intended to ensure the consistent operation of the electric grid and wholesale electricity markets, promote market efficiency, and protect the interests of consumers and market participants.

Narrative of the Case

The PJM Interconnection case is multidimensional, with a focus on its establishment, operational processes, and regulatory monitoring. PJM, which began as the Pennsylvania-New Jersey Interconnection (PNI) in the early twentieth century, has grown into a critical regional transmission organization (RTO) that manages the power grid and wholesale electricity markets in 13 states across the Mid-Atlantic and Midwest regions of the United States.

At its core, PJM operates as an independent company separate from generator ownership, to ensure the transmission grid's reliability and promote competitive wholesale energy markets. Its construction required a joint effort among participating utilities, first from Pennsylvania and New Jersey, with government grants and loans, ratepayer payments, and corporate investments.

Institutional systems at PJM include stakeholder governance, regulatory oversight, and market monitoring measures. Stakeholders, such as utilities, generators, consumers, and state regulators, actively participate in decision-making processes, ensuring that varied perspectives are taken into account when developing rules and operating markets. The Federal Energy Regulatory Commission (FERC) and state public utility commissions (PUCs) regulate PJM's operations to protect market integrity and consumer interests.

The oversight of PJM includes day-to-day grid operations, infrastructure investments, and market design. Grid operators at PJM maintain grid stability, control congestion, and coordinate repair efforts to protect the electric system's security. Infrastructure investments are made to improve transmission assets and adapt to changing electricity demand and generating trends. Market designs and rules are constantly examined and revised to reflect changing market situations, technical improvements, and regulatory constraints.

PJM's market monitoring role, as well as the presence of an Independent Market Monitor (IMM), are critical to its operating efficiency. The IMM acts as a watchdog, detecting and reducing market manipulation and anticompetitive behavior while fostering market competitiveness and transparency.

Overall, the PJM Interconnection case demonstrates the value of collaborative governance, effective regulatory oversight, and proactive maintenance in ensuring the electric grid's reliability and promoting competitive wholesale electricity markets across a large and diverse region.

Key Issues

Several key issues affect the PJM Interconnection, ranging from operational challenges to regulatory and market-related concerns. Here are some of the key issues:

Capacity Market Reforms: The PJM capacity market, which assures there is enough generation capacity to satisfy future energy demand, has encountered considerable obstacles. Oversupply, subsidized resources distorting market prices, and FERC rulings on capacity market rules have all driven PJM to propose capacity market design improvements to retain dependability while addressing market distortion.

State Policies and Subsidized Resources: State policies, such as renewable energy mandates and clean energy subsidies, have resulted in an influx of subsidized resources into the PJM market. This influx may affect market prices and reduce the competitiveness of established generators, raising worries about market efficiency and reliability.

Grid Resilience and dependability: PJM has problems in ensuring grid resilience and dependability in the face of catastrophic weather events, cyber threats, and aging infrastructure. It is critical to ensure the grid can tolerate disturbances and recover promptly to provide consumers with a stable electricity supply.

Transmission Planning and Expansion: As the energy landscape changes with the incorporation of renewable energy resources, PJM must make significant transmission planning and expansion efforts to accommodate the altering generating mix. Identifying and investing in vital transmission infrastructure is critical for ensuring the consistent and efficient distribution of electricity across the PJM footprint.

Market Monitoring and Enforcement: PJM's market monitoring and enforcement processes are crucial to maintaining market integrity and competitiveness. Nonetheless, worries regarding market manipulation, anticompetitive activity, and enforcement efficacy remain. Improving market monitoring and enforcement procedures is critical for ensuring fair and transparent wholesale electricity markets.

Grid Modernization and Technological Integration: PJM must address the problems and opportunities that come with grid modernization and technological integration. Adopting innovative technology, such as sophisticated grid analytics, energy storage, and distributed energy resources, can improve grid flexibility, efficiency, and resilience. However, incorporating these technologies into PJM's operations necessitates overcoming regulatory, technical, and market challenges.

Environmental and Climate issues: PJM is under increasing pressure to incorporate environmental and climate issues into its operations and market design. Transitioning to greener energy sources, lowering greenhouse gas emissions, and promoting energy efficiency are critical for mitigating climate change and reaching sustainability targets. Balancing environmental aims with grid dependability, affordability, and market competitiveness is a major problem for PJM.

Discussion Questions

How does the PJM Interconnection contribute to ensuring grid reliability and resilience across its 13-state footprint?
What are the key challenges and opportunities associated with integrating renewable energy resources into PJM's grid?
How do state policies and subsidies for clean energy resources impact PJM's wholesale electricity markets and grid operations?
What role does PJM play in promoting market competitiveness and ensuring fair market outcomes for all participants?
How does PJM address concerns relate to capacity market reforms and the potential impact on reliability and market efficiency?
What strategies can PJM adopt to enhance grid modernization efforts and integrate advanced technologies for improved grid flexibility and efficiency?
How does PJM collaborate with stakeholders, including utilities, regulators, and consumers, to address key issues and shape the future of the electric grid?
What are the implications of evolving energy policies, technological advancements, and climate considerations for PJM's operations and market design?
How does PJM balance environmental objectives, such as reducing greenhouse gas emissions, with maintaining grid reliability and affordability?
What lessons can other regional transmission organizations and grid operators learn from PJM's experiences and best practices?

Citations

https://www.pjm.com/about-pjm/who-we-are

https://www.pjm.com/about-pjm

https://pjm.com/about-pjm/who-we-are/territory-served

https://www.ferc.gov/industries-data/electric/electric-power-markets/pjm

https://www.utilitydive.com/news/pjm-private-equity-power-pants-gas-ieefa/697129/

https://www.pjm.com/-/media/committees-groups/committees/fc/2023/20231214/20231214-item-03b---3q2023-pjm-unaudited-financial-statements.ashx

Federal Energy Regulatory Commission (FERC), "Wholesale Electricity Market Participation Agreement", https://www.ferc.gov/wholesale-electricity-markets/participation-agreement

U.S. Department of Energy (DOE), "Grid Modernization Initiative", https://www.energy.gov/oe/grid-modernization-initiative

U.S. Department of Homeland Security (DHS), "Critical Infrastructure Security and Resilience", https://www.dhs.gov/topic/critical-infrastructure-security-and-resilience