Operating Reserves and Extended Locational Marginal Pricing 1

Operating Reserve Charges in PJM Calendar Year 2012 Operating Reserves $648.7 Million First Five Months of 2013$433.6 Million 2 First and foremost, operating reserves are unknown when a trader enters in a transaction. Thus there is no way for me to evaluate that risk for my traders upfront. The numbers above are telling because they demonstrate that in the first five months of 2013 there was a 55% increase in operating reserves. No analysis of historical data could have predicted this volatility. The rate for East Deviations has been has high as $32. Higher than the LMP.

Who Is Receiving Operating Reserve Charges And The Impact On the Market According to the PJM Independent Market Monitor ◦The top 10 units receiving Operating Reserve Credits received 40.3% of all credits. ◦The top 10 organizations received 86.9% of all credits. Incremental offers of Energy /Dec have been decreasing in PJM. ◦INCs have decreased 28.2% in 2013 and 12.8% in 2012 ◦DECs have decreased 21.6% in 2013 and 11.4% in

Problems with Current Locational Marginal Pricing Currently Energy prices are being calculated through the Security Constrained Economic Dispatch (SCED) SCED is the primary engine for determining Energy and Reserve product clearing for both Day Ahead and Real Time markets. A drawback of SCED is that it does not allow certain Demand Response and Fast Start Resources to set price. SCED also may not capture Start up and Shut down cost and No-Load cost. The cost are recouped in the form of Operating Reserve Charges. 4

A Potential Solution: Extended LMP Extended LMP is a new computational method It allows Fast Start Resources and Emergency Demand Response that are either scheduled at limits or are offline to set price. Both Start-Up/Shut-Down Offer costs and No-Load Offer costs will be reflected in the LMPs and MCPs set by Fast Start Resources. The price will more accurately reflect actual system conditions. 5

Benefits of Extended LMP Extended LMP calculates price using incremental increase in energy that takes into account unit commitment cost. Extended LMP minimizes the amount of Operating Reserve cost need to make generators whole. Extended LMP adds transparency to Uplift cost allowing market forces to react. Extended LMP cuts down on contentious cost allocation discussions in the stakeholder process. 6