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Analysis finds MOPR could cause collapse in PJM capacity market pricing

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Analysis finds MOPR could cause collapse in PJM capacity market pricing

The PJM Interconnection's capacity market could see a collapse in pricing if four states with aggressive climate goals choose to leave that market in response to rule changes aimed at countering the impact of state subsidies for clean energy resources.

In response to a complaint filed by merchant generators four years ago, the Federal Energy Regulatory Commission in December 2019 directed PJM to impose a minimum offer price rule, or MOPR, on any new resource and some existing resources bidding into the grid operator's capacity market that receive a material state subsidy.

To the dismay of clean energy advocates, FERC has found that PJM's capacity market rules were unjust and unreasonable because they failed to account for the price-suppressive effect of subsidized resources with low to zero marginal fuel costs competing against thermal generators such as coal- and natural gas-fired units.

Pursuant to the December 2019 order, PJM will be required to set an administratively determined price floor for state-subsidized resources bidding into PJM's capacity auction. The requirement would make subsidized nuclear power plants and renewable generation such as that produced by state-procured offshore wind farms far less competitive in the region's capacity auction, which is held three years in advance of when the capacity will actually be needed to ensure that the 13-state power market has an adequate supply of power.

One of the biggest questions hanging over FERC's order is how many states within PJM's footprint will opt to exercise what is known as fixed resource requirement, or FRR. That off-ramp allows states to remove their utilities' entire load from the capacity market and self-procure capacity through bilateral contracts. The number of states that will exit PJM's capacity market is still unclear because doing so will require complex legislation, administrative rulemaking, or both. The FRR option is also a five-year commitment (with limited exceptions), making it a bold step for states with little current expertise in procuring their own capacity.

With FERC now considering a flood of requests to reconsider its order, energy market experts at the consulting firm ICF International on Feb. 4 presented four different cases modeling the potential effect of state action in response to the MOPR.

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ICF's first two cases showed that a fully implemented MOPR without any states opting for an FRR will increase capacity prices by between 25% and 30% in the near-term relative to PJM's previous capacity market construct. In contrasting those two scenarios, the firm found that merchant thermal generators stand to benefit from the upward pressure on capacity prices created by a corresponding drop in supply as state-supported resources fail to clear the auction.

However, in its base case or Case 3 the firm assumed that New Jersey and Maryland will both leave PJM's capacity market in order to avoid double-payments as they pursue their own aggressive clean energy targets. In addition to a zero-emission credit program that compensates its nuclear generators for their emissions-free attributes, New Jersey also has a 50%-by-2030 clean energy target that includes an aggressive offshore wind mandate. Meanwhile, Maryland has its own offshore wind requirement and lawmakers there are expected to consider legislation this year that would require the state to get 100% of its electricity from emissions-free sources by 2040.

During a Feb. 4 webinar, the analysts noted that the Maryland Public Service Commission has already asked FERC to delay PJM's next capacity auction until 2021 to give state lawmakers time to pass legislation in response to the MOPR. Over the long-term, however, they predicted that capacity prices under Case 2 and Case 3 will stabilize as higher capacity prices drive increased investment in new generation.

In a fourth case, ICF International also modeled the potential effect of Illinois and Virginia joining New Jersey and Maryland in exercising the FRR option. Illinois also has a zero-emission credit program for its nuclear plants, and Dominion Energy Inc. subsidiary Dominion Energy Virginia announced plans to build "the largest offshore wind project" in the U.S. days after the state's governor issued an executive order last year calling for 100% carbon-free electricity by 2050.

Under that scenario, the firm found that system-wide capacity market prices will likely fall between 25% and 30% in the near-term as the four states which collectively represent nearly half of the load in the PJM region remove their associated demand, placing downward pressure on capacity prices. Mid- and long-term capacity pricing in Case 4 would also remain significantly lower than that of the other three scenarios, according to ICF International's modeling.

Judah Rose, ICF International's executive director of energy markets, emphasized during the Feb. 4 presentation that the firm's modeling results assume "essentially no change" in procurement related to state clean energy programs.

"As indicated, what we're saying about renewables and the various different clean energy sources that are subject to the state subsidies is that while there is a risk ... there's also an opportunity," Rose said, adding that states opting for an FRR could actually contract more with renewables.

"Bottom line is [the FRR is] an important variable," Rose said.