The Federal Energy Regulatory Commission’s July 23 technical conference on PJM Interconnection governance zeroed in on a widening disconnect: the physical capability of the grid to flex has outpaced the market mechanisms designed to compensate and dispatch that flexibility. The conference agenda signals that FERC is preparing to address the institutional lag, a move that could reshape how the nation’s largest wholesale electricity market values fast-ramping resources, storage, and demand response.
The institutional gap in PJM’s flexibility market
PJM’s capacity market, the Reliability Pricing Model, was designed around a paradigm of baseload generation with predictable output. The market’s forward procurement structure, clearing three years ahead, struggles to capture the value of resources whose primary contribution is operational flexibility rather than firm energy volume. Fast-start gas turbines, battery storage, and increasingly sophisticated demand response programs can deliver value that the current market construct only partially recognizes.
The technical conference represents a formal acknowledgment from FERC that the rules governing PJM’s markets need examination through a flexibility lens. This is not a hypothetical concern. PJM has experienced tightening reserve margins, with planning reserve margins rising from roughly 15 percent to over 20 percent in recent years as the resource mix shifts toward intermittent generation. The conference agenda covers topics including capacity market design, resource adequacy constructs, and the treatment of emerging technologies in PJM’s tariff.
The core issue is that flexibility has attributes that do not fit neatly into PJM’s existing product definitions. A battery that can discharge for four hours has capacity value, but its true worth lies in its ability to respond within milliseconds to frequency deviations or to shift load across time periods. The current market design compensates megawatt-hours and megawatts of capacity, not the speed of response or the duration of flexibility that a resource can provide.
How capacity market design lags behind grid needs
The broader energy transition context makes this institutional gap more consequential. Across the United States, grid operators are grappling with similar challenges. The California Independent System Operator has implemented day-ahead market enhancements to better value flexibility. The Midcontinent Independent System Operator has introduced ramping products. PJM’s approach, by contrast, has been more incremental, with flexibility value embedded in various ancillary service products rather than recognized as a distinct, compensable attribute.
The financial stakes are substantial. PJM’s capacity market clears at prices that can reach hundreds of dollars per megawatt-day in constrained zones. If the market design fails to properly value flexibility, it risks under-compensating the very resources needed to integrate higher levels of renewables. Conversely, over-paying for flexibility that does not materialize would impose costs on ratepayers. Getting the market design right matters for both grid reliability and consumer costs.
There is also a temporal dimension to the flexibility challenge. The three-year forward procurement horizon in PJM’s capacity market was intended to provide price signals for new investment. But flexibility needs are increasingly determined by conditions that only become clear closer to real-time: the penetration of distributed solar, the retirement schedule of coal plants, the availability of gas pipeline capacity on peak days. A market that locks in capacity commitments years ahead may not align with the flexibility requirements that actually emerge.
What FERC’s involvement means for market participants
FERC’s decision to convene this technical conference rather than simply issuing a rulemaking suggests the commission is gathering information before charting a path forward. The conference format allows stakeholders to present their perspectives on the record, creating a foundation for subsequent commission action. This could take the form of a notice of proposed rulemaking, a policy statement, or a directive to PJM to file tariff changes.
The involvement of a former PJM board member in the public discourse around this issue underscores the depth of concern among those who have been inside the market operator’s governance structure. The critique is not that PJM staff lack technical expertise, but that the stakeholder governance process, which requires consensus among diverse interests, can slow the adaptation of market rules to changing grid conditions.
For market participants, the key question is not whether PJM’s market design will change, but how quickly and in what direction. Generators with flexible capabilities have an interest in market reforms that create new revenue streams for their flexibility attributes. Traditional baseload generators may resist changes that could reduce their capacity revenues. Consumer advocates will watch to ensure that any new compensation mechanisms are tied to actual reliability value rather than becoming another uplift payment.
Who this affects
- Utility planners: Resource adequacy assessments based on PJM’s current capacity construct may undercount the contribution of flexible resources. Planners should stress-test their portfolios against a scenario where PJM adopts more granular flexibility valuation, potentially changing the optimal mix of storage, peakers, and demand response.
- Storage and fast-ramping developers: A market redesign that properly values flexibility could improve project economics by creating new revenue streams beyond energy arbitrage and ancillary services. Developers should track the FERC proceeding closely and consider how their projects would perform under alternative capacity market designs.
- Financial analysts covering IPPs: The direction of PJM market reform will affect revenue projections for merchant generators. Assets that can provide flexibility may see improved valuations, while baseload assets without flexible capabilities could face headwinds if capacity market rules shift.
- State utility commissioners: The outcomes of this proceeding will influence wholesale power costs that flow through to retail rates. Commissioners should engage in the FERC process to ensure that the interests of their states’ ratepayers are represented as PJM’s market rules evolve.
What to watch next
- FERC’s post-conference directive: The commission typically issues a follow-up order after a technical conference, which could signal whether it intends to pursue a rulemaking or direct PJM to file specific tariff changes.
- PJM’s stakeholder process: PJM’s Market Implementation Committee and related stakeholder groups will likely develop proposals in response to the conference. The speed and substance of those proposals will indicate how seriously the market operator treats the flexibility gap.
- Comparable initiatives in other RTOs: NYISO, MISO, and SPP are all exploring similar issues. Their approaches may provide a template or a cautionary tale for PJM’s reforms.
- Capacity market clearing results: The next few PJM capacity auctions will show whether current prices are attracting the flexible resources needed, or whether the market signal remains insufficient to drive the required investment.
Bottom line
The July 23 technical conference marks the beginning of a process that could fundamentally alter how PJM compensates grid flexibility. The technology to provide that flexibility exists today, but the market rules that would unlock its full value remain mired in a governance process designed for an earlier era of grid operations. The outcome of this proceeding will determine whether PJM can close the gap between what the grid needs and what the market rewards – a gap that will only widen as the resource mix continues to evolve.
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Note: facts and figures attributed above to Utility Dive reflect that outlet's original reporting. Broader context, cross-sector connections, and forward-looking scenarios reflect independent analysis by our editorial team.
About this article: Drafted by Energy Ai with AI-assisted research and writing based on public reporting, then reviewed under our editorial process before publication.
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