Pandemic, upcoming elections factor into state capacity market exit decisions

Washington — Decisions to exit PJM Interconnection's capacity market -- already fraught with market power and cost concerns -- have been further complicated by the potential for a change in the White House to prompt policy whiplash and the ongoing health crisis that has limited states' funds and resources available to tackle the daunting task of rethinking resource adequacy, PJM stakeholders said July 15.

The Federal Energy Regulatory Commission's actions intended to stamp out the potential for artificial price suppression brought on by state subsidized generation have frustrated states with aggressive decarbonization targets and clean energy goals.

Panelists participating in a webinar hosted by Power Markets Today held varying positions on whether PJM states should prepare to work within the confines of an expanded minimum offer price rule, or look to capacity market alternatives.

Joseph Bowring, president of Monitoring Analytics, PJM's independent market monitor, said the MOPR can work despite it not being the optimal policy. He rattled off a litany of problems that could arise from states electing PJM's fixed resource requirement (FRR) alternative, including that it would likely increase customers' payments for capacity based on the IMM's analyses, and that there were no rules regarding market power mitigation, competition, relative costs or goals.

On the other hand, an Exelon executive spoke of the FRR as "a solution to the MOPR" and the only solution FERC left on the table.

"Those states that are advancing environmental objectives should not delay in developing an FRR design," Jason Barker, Exelon's director of wholesale market development, said. Once PJM resumes its capacity auctions, which is expected early next year, "the states will lose the flexibility to develop FRR plans that assure the achievement of state capacity and environmental objectives at a reasonable cost," he said.

States, however, are having to make these decisions with presidential elections looming and no clear end in sight to the coronavirus pandemic.

Pandemic impact

"There is not a single aspect of our operations that is not impacted by" the COVID-19 outbreak, New Jersey Division of Rate Counsel Director Stefanie Brand said.

An FRR proposal currently on the table as part of a resource adequacy investigation launched by the New Jersey Board of Public Utilities would require state legislation to enact, "a time consuming and a bit ugly process" for the state, Brand said.

There is also concern about the BPU's ability to oversee the FRR process, given that the agency has not overseen generation or capacity for 20 years. Brand said she was skeptical that the state, which is facing a $10 billion budget shortfall through fiscal 2021, could muster the funds needed to staff up the agency to bring in the expertise needed. She added that "it is virtually impossible to think that New Jersey is going to be in a position to go FRR before" PJM restarts its auctions.

With a pandemic as the backdrop, which Brand said will see her staff furloughed for 10 out of the 20 working days in July, "when we want to spend money on things or when we want to do things that may cost more money, you've got to take into account the fact that people just aren't going to be able to afford it for a while."

Brand added: "At this moment, I just don't think [FRR is] going to happen because I think we're going to be in this pandemic for a while and there is just no money to spare."

Possible Biden administration

In response to a question on whether a Biden administration would reduce states' urgency to leave PJM as a Democratic majority at FERC would be expected to ditch the MOPR in its current form, panelists agreed there were too many assumptions embedded in the question to give a definitive answer, but that it was something to keep in mind.

"It raises an important point about the fact that regulatory changes are not immutable," as federal policies can change as can state goals, Bowring said. Thus, he advocated "to keep as flexible and market-based options as possible available to allow states to react to changes in policy."

Brand offered that "it's something that has to be added to the mix in terms of consideration because I think once you go FRR, it's going to be really hard to go back."

But Barker took the position that the FRR "provides states the flexibility to move forward and continue to address the ongoing carbon problem during the pendency of these various exogenous impacts."

He asserted that PJM's tariff "establishes the means for a state to unwind FRRs if there are regulatory changes," a point with which Bowring took issue, contending that a state can't simply unwind a five-year contract, for example.