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PJM stakeholders struggle to find ideal capacity-market fix

As the PJM Interconnection grapples with resource adequacy questions while making changes to its capacity market, a diverse group of stakeholders said a durable carbon pricing mechanism could help and that capacity auctions should restart while additional market improvements are considered.

"The pace of change in our industry is accelerating with changes in technology, distributed generation, batteries, offshore wind, electric vehicles, significantly improved consumer control and flexibility of their load and smart grid technologies, just to name a few," PJM President and CEO Manu Asthana said during the grid operator's Sept. 9 General Session that focused on resource adequacy.

Some PJM states are taking "aggressive steps" to decarbonize their power generation sources, Asthana said, adding that changes are happening now. He noted there are about 107 GW of new projects in PJM's interconnection queue, of which roughly 86% is either solar, wind or battery.

Illinois Gov. J.B. Pritzker said in a pre-recorded message for the session that the "urgent need to address climate change gives us common cause and we know systems transfer faster when all players are willing to move."

Pritzker in August laid out a plan for Illinois to operate solely on clean energy resources by 2050.

A multifaceted approach will be needed that expands renewable energy, invests in batteries, focuses on EVs and more, the governor said, adding that structural changes to encourage the rapid development of renewable energy could include a market-based solution like a carbon price that makes dirty energy less competitive and supports clean energy and air.

PJM investors think the risk in competitive power generation is high and in a market with falling demand it is hard to see what technologies will influence future power prices, with capacity auction delays adding to the uncertainty, said Stephen Byrd, head of North American power, utilities and clean tech equity research at Morgan Stanley.

PJM has not run its annual base residual capacity market auction since 2018 as market rule changes have gone through the Federal Energy Regulatory Commission process.

Investors are also seeing the tension between state goals and market impacts, Byrd said.

Capacity market reform

There are "problems" with PJM's capacity market, and capacity markets everywhere are experiencing significant challenges, said Gina McCarthy, president and CEO of the Natural Resources Defense Council and former U.S. Environmental Protection Agency administrator.

The energy transition is being held up in many ways by PJM's capacity market and it needs to change, McCarthy said.

Layering on FERC's Minimum Offer Price Rule creates "significant interference in the market … and there is no way that we should not fight that in court and find a way to move forward together," she said.

Multiple states, including Illinois, have been contemplating leaving the PJM capacity market through the fixed resource requirement option that would require load-serving entities to procure their own capacity, although that option comes with its own challenges.

But James Maiz, partner at Rockland Capital, a firm that is heavily invested in PJM's markets, said that if states choose the fixed resource requirement option, it could hasten the end of PJM's capacity market and would not be in the interest of many market participants. He urged a solution that satisfies stakeholders and preserves markets.

While the capacity market has been "clunky and more expensive" than preferred, any alternative resource adequacy plan in PJM would come under fire, said Travis Fisher, president and CEO of the Electricity Consumers Resource Council, an advocacy group for large industrial energy users.

Additionally, recent state policies in Illinois and Ohio regarding nuclear power plant subsidies appear to have been "based on bad faith dealings and bribery," so the alternative is "not so pretty," Fisher said. Utilities in both states have been tied to alleged scandals involving the passage of nuclear subsidy legislation.

However, if PJM nuclear plants struggling to compete in the merchant wholesale market are retired early, thousands of megawatts of carbon-free power are lost, which makes the energy transition even more challenging, said Matthew Crozat, senior director of policy development at the Nuclear Energy Institute. Exelon Corp. in August said it would shut two of its nuclear plants in the PJM portion of Illinois in 2021 because of market conditions.

Todd Snitchler, president and CEO of trade group Electric Power Supply Association, which represents competitive market power producers, said carbon pricing or a well-designed clean energy standard is needed and that without such mechanisms, tension between federal and state jurisdiction will persist.

All parties are seeking a durable regulatory framework for sustainable environmental progress, Snitchler said, adding that capacity auctions need to restart while stakeholders consider further market reforms.

Jared Anderson is a reporter for S&P Global Platts. S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.