A panel of experts on Feb. 10 grappled with the potential impact of a major overhaul to the PJM Interconnection's capacity market, with one utility executive predicting that new rule changes mandated by federal regulators will place states with bold climate targets in an "untenable" position.
Another executive sought to downplay the overhaul's potential impact on renewables. But a PJM executive reiterated that the grid operator does not view the required market redesign as a long-term solution that successfully reconciles disparate state energy policies.
The discussion, hosted at the National Association of Regulatory Utility Commissioners' Winter Policy Summit in Washington, D.C., centered on a recent order issued by the Federal Energy Regulatory Commission that has prompted widespread speculation about the future viability of PJM's capacity market construct.
As the nation's largest grid operator, PJM oversees a wholesale power market covering all or part of 13 states plus the District of Columbia. To maintain system reliability, PJM holds annual capacity auctions three years in advance to ensure enough supply is available to meet demand. The $9 billion-plus auctions, which account for about 20% of wholesale revenues within the PJM region, also guide investments in new generation and inform decisions about whether to retire legacy resources.
Issued in December 2019, FERC's order directed PJM to expand a minimum offer price rule, or MOPR, to any new generator and some existing resources such as at-risk coal and nuclear plants that receive material state subsidies. In addition to existing units that receive state support, the MOPR will set an administratively determined price floor for any subsidized new resource seeking to bid into the PJM capacity market, effectively raising those bids to reflect out-of-market payments.
The order was intended to resolve a complaint filed in 2016 by a coalition of merchant generators who argued that PJM's capacity market auction rules were unjust and unreasonable because they failed to account for the price-suppressive impact of bids from subsidized resources.
During the Feb. 10 panel discussion, Mason Emnett, Exelon Corp.'s vice president of competitive market policy, noted the order has already prompted a fierce backlash from states with policies that compensate carbon-free generators for their environmental attributes. While the MOPR would exempt most existing clean energy resources that benefit from state subsidies, new state-procured resources are "not going to be able to clear, they're not going to be able to earn capacity revenues, and PJM will replace those resources essentially with fossil resources," the executive said.
"That's essentially unsustainable, particularly for states with clean energy programs, to have their programs undermined and payments transferred from clean resources to fossil resources," Emnett said.
However, Travis Kavulla, vice president of regulatory affairs for NRG Energy Inc., argued that the falling cost curve for renewables would still allow subsidized wind and solar resources to clear in the company's home state of Texas if it adopted a similar capacity market construct. "It's much ado about nothing for renewables," Kavulla said. At the same time, however, he called for market-based solutions to accommodate "boutique technologies" such as a wave of state-procured offshore wind farms that will be subject to the MOPR.
While independent estimates of the near-term annual price impact on consumers have ranged from $2.4 billion to $5.7 billion, PJM still has not yet completed its own detailed analysis of the order, said Asim Haque, the grid operator's executive director of external affairs.
However, Haque noted that PJM's independent market monitor has estimated the near-term impact will be minor. That is primarily because FERC's order exempted existing resources already receiving state subsidies. "We may not have as deleterious an impact for state policy endeavors as at least initially perceived," Haque said.
Nevertheless, Haque questioned the MOPR's long-term durability, juxtaposing a recent state bailout for old coal plants in Ohio against stepped-up climate action by states in the Northeast. "PJM, just as any competent business, is looking at whether its products and services meet the needs of its constituents," he said. "And again, in the long-term, we don't believe this is a durable solution."
'The devil is in the details'
Panelists generally agreed that placing a price on carbon emissions, either at the federal level or within wholesale power markets, would be a superior market-based mechanism compared to the MOPR. But they also expressed doubt that such a mechanism will materialize any time soon.
Noting that PJM has convened a task force to study carbon pricing within its footprint, ClearView Energy Partners LLC Managing Director Christine Tezak said she is still skeptical the grid operator can achieve the consensus needed to actually implement a price on carbon.
"While, in theory, adopting a carbon price in PJM could go a long way to solving the problem, again the devil is in the details," Tezak said. "Pardon me while I don't hold my breath for 14 different cats to all get in the same basket."
Emnett added that while Exelon supports ongoing carbon pricing efforts in the New York ISO, the company is not banking on PJM following suit.
With its existing nuclear plants in Illinois and New Jersey now subject to the MOPR, Emnett said Exelon is now working with states to use "the tools they do have available" to avoid "harsh customer impacts." That could include what is known as a Fixed Resource Requirement alternative option that allows states to pull all of their utilities' load out of the PJM capacity market and procure their own capacity. Emnett noted that Illinois lawmakers are already considering legislation that would direct the state to procure its own capacity through a program run according to auction-like principles.
Having held its last capacity market auction in 2018, Haque said PJM would prefer to run auctions for the 2022/2023 and 2023/2024 commitment periods "soon" because the future "is basically becoming the present."
He also said that states will have time to respond to the MOPR because PJM does not plan to hold its next auction until at least six months after FERC signs off on a compliance filing responding to its December 2019 order. PJM's compliance filing is due March 18.
However, Emnett said PJM could also decide to hold up to five capacity auctions in 2021 that stretch out to the 2025/2026 delivery year. "That's not a long-term issue, that's a very near-term issue," Emnett said, noting that PJM's last capacity market auction produced $9 billion in capacity supply obligations for generators.
"Ultimately the question is, 'What do states want that to be spent on?'" Emnett said. "To the extent that the clean resources are being pushed out, that money is being transferred to fossil ... that's just what is going to happen." (FERC dockets EL16-49, EL18-178)