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PJM market participants see brighter path forward under MOPR compliance plan

Stakeholders previously at odds over sweeping capacity market rule changes directed by the Federal Energy Regulatory Commission saw sound judgment in the PJM Interconnection's highly anticipated compliance filing responding to that controversial order.

PJM holds annual capacity auctions three years in advance of when that capacity will be needed to determine the price winning bidders will receive regardless of whether that capacity is actually used. The capacity market is designed to ensure that PJM can maintain system reliability during peak usage by acquiring enough capacity to meet peak load plus a reserve margin.

To combat the potential price-suppressing effects of subsidized resource participation in PJM's capacity market, FERC in December 2019 ordered the grid operator to expand the application of a minimum offer price rule, or MOPR, to all new and some existing resources in PJM that are eligible to receive state subsidies. Under the order, those resources will become subject to administratively determined price floors, a tool that the agency has increasingly employed to ensure that out-of-market subsidies do not impact the outcome of competitive markets.

Concerns of nuclear, renewable proponents somewhat eased

PJM on March 18 filed its plan for complying with the FERC order, and state-subsidized nuclear generation came out as one of the winners. PJM's calculation of the default minimum offer price for existing multiunit nuclear facilities would amount to $0/MW-day. As such, "we expect the impacts to offering behavior to be isolated to renewables," S&P Global Platts Analytics analyst Kieran Kemmerer said.

However, Kemmerer also predicted that solar generation that can adjust to the sun's position had a fair chance of clearing in certain constrained local zones. The average default prices for those resources is around $175/MW-day, according to the filing, while auction clearing prices in constrained regions neared $200/MW-day for the 2021-22 delivery year.

PJM's fixed resource requirement allows states to remove their utilities' entire load from the capacity market and self-procure capacity through bilateral contracts. In the aftermath of FERC's December 2019 order, some predicted that several states may choose to use that option and have their resources no longer participate in PJM's capacity market. Whether PJM's compliance filing may change that outcome is still uncertain.

"Given aggressive renewable targets in several PJM states, it is still possible that states will elect to remove their load and procure resources under PJM's [fixed resource requirement] alternative, although under the proposed timeline states would have to make that decision quickly," Kemmerer noted.

The reactions from stakeholders and market participants to PJM's filing varied as expected, but renewable energy groups appeared a bit less concerned than they first expressed.

"PJM's proposal provides the flexibility necessary for renewable resources to demonstrate that they are among the lowest cost and most reliable sources of capacity available today," Amy Farrell, senior vice president of government and public affairs for trade group American Wind Energy Association, said in a statement.

Some developers seemed to be comfortable with the option for a resource-specific exception that would allow a resource to demonstrate that its actual costs are less than the applicable MOPR floor price, along with a competitive exemption for electing to forgo acceptance of any state subsidy. And while the solar power industry disagreed with some aspects of the order, it too applauded PJM's effort to allow resource-specific bidding behavior.

PJM's filing will allow renewable generators to "properly identify a project-specific bid price for bidding into the capacity market auctions" that provides a "better opportunity to compete on a level playing field with other capacity providers and to help meet states' clean energy goals," Katherine Gensler, Solar Energy Industries Association vice president of regulatory affairs, said in a statement.

Gensler also called for capacity auctions to start up again quickly to bring this "multi-year debacle to a close."

Further clarity on RECs, RGGI

Some also had expressed concern that FERC's December 2019 order might apply to voluntary renewable energy credits, which allow corporations to directly procure renewable energy. Pro-renewables groups such as Advanced Energy Economy specifically asked the commission in requests for rehearing to clarify that the MOPR order does not apply to those types of transactions.

In response, PJM proposed to clarify that those capacity suppliers who generate RECs or equivalent credits may elect a competitive exemption provided they certify the credits will only be used and retired for voluntary obligations and not to meet state-mandated renewable portfolio standards.

"Now there seems to be a pathway forward for voluntary RECs that PJM came up with on its own, and it will be interesting to see how FERC rules on that," Ari Peskoe, director of Harvard Law School's Electricity Law Initiative, said in an interview. "That's a big concession that even merchant generators were looking for because some of these merchant companies actually own renewable generation and even they thought FERC had gone too far on the voluntary REC issue."

Peskoe also noted PJM sought to clarify that the Regional Greenhouse Gas initiative should not be implicated by the MOPR simply because it benefits low-emitting and carbon-free resources. The grid operator's filing argues that the cap-and-trade scheme for carbon dioxide emissions at power plants is no different than other air quality regulations that impose environmental compliance costs on fossil generators.

Merchant power generators, some of which filed the 2016 complaint kicking off this proceeding, were mostly pleased with PJM's filing and also called for a quick resumption of the region’s three-year-forward capacity auctions.

PJM worked "diligently under a compressed timeline" to conduct a thorough stakeholder process and develop a MOPR implementation plan while ensuring perspectives from all relevant groups were considered and incorporated into its compliance filing," Todd Snitchler, president and CEO of the Electric Power Supply Association, said in a statement.

"Our members build projects and make investment decisions at their own risk, without subsidies or captive customer-based rate structures that guarantee a return on investment no matter whether a project is on time or over budget. This means accurate market signals and pricing are paramount to our ability to provide customers with low-cost reliable electricity," Snitchler said.

Some gas may not clear

Despite the general praise for PJM's compliance plan, fossil generators face challenges if PJM's plan to hold the capacity auction for the 2022-23 delivery year no later than March 31, 2021, is approved by FERC.

It would be "seemingly infeasible for any fossil fuel-fired generator not already under development to clear in the auction and be online in time for the obligation period," Kemmerer asserted. Still, he noted that roughly 5.5 GW of gas-fired generation currently under construction in western PJM intends to offer new capacity in the upcoming auction.

"Considering the supply-side impacts of House Bill 6 in Ohio and First Energy's recent recall of Beaver Valley’s deactivation notice, when coupled with the bearish revision to the variable resource requirement curve, it will be increasingly challenging for these new gas-fired combined cycles to clear in the capacity market," Kemmerer said. "Being subject to a default offer price ... of $152/MW-day, we expect all of these [combined cycle resources] in development to pursue a resource-specific exemption to MOPR."

Chairman Neil Chatterjee declined to forecast how quickly the commission could rule on the compliance filing but confirmed that staff was already at work analyzing the filing, even while dispersed and teleworking due to precautions put in place as the country attempts to get a handle on the spread of the coronavirus.

"There is timing around the auctions in PJM that we are cognizant of," Chatterjee told reporters March 19. "We still have pending matters before us on rehearing, and we will work diligently to get those done." (FERC dockets EL16-49, EL18-178)

Jasmin Melvin and Jared Anderson are reporters for S&P Global Platts. S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.