Industry interests chiming in on the PJM Interconnection's efforts to adjust its capacity market rules to account for state-subsidized resources further clarified the tough decisions federal regulators must make in trying to accommodate state resource choices while still maintaining the competitiveness of markets.
It is complicated, but understandable
PJM in April asked the Federal Energy Regulatory Commission to choose between two separate proposals aimed at addressing the price-suppressive impacts that offers from resources receiving out-of-market support have on its capacity market.
A divided FERC in June rejected both proposals and instructed the grid operator to modify its minimum offer price rule, or MOPR, designed to prevent resources from gaming the system by bidding under their cost of production. FERC said the MOPR should now apply to virtually all new and existing resources that receive out-of-market payments, thereby eliminating the many existing exemptions.
But left unclear was exactly how PJM would establish a minimum offer price for nuclear and renewable resources with very low or no marginal costs. If that price is set too high, it could force them to submit bids that are noncompetitive. In such cases, customers of utilities in states that have decided to subsidize capacity resources would be forced to pay for that same capacity twice — once through the subsidy and again in the capacity market.
To avoid such double payments, FERC said PJM should also allow utilities to acquire the capacity needed to meet some of their customers' needs through bilateral contracts instead of having to do so through PJM's capacity market, dubbed a "resource-specific [fixed resource requirement, or FRR] alternative option."
While utilities in the PJM have always had the option of using bilateral contracts to obtain their capacity, very few have done so because the existing rules require them to obtain either all or none of their capacity through the capacity auctions. FERC's FRR alternative would do away with that all-or-nothing requirement and allow a utility to meet some of its capacity needs by signing a bilateral contract with a state-subsidized resource and the rest of its needs through PJM's capacity market.
In response, the grid operator on Oct. 2 proposed to expand the MOPR by requiring all resources (with a few, very limited exceptions) to bid into the capacity market at a minimum level representing their operating costs and without factoring in the cost savings from their subsidies.
However, PJM also proposed a modified version of FERC's suggested FRR alternative requirement called an extended resource carve-out, or RCO. Under that approach, PJM still would allow a resource and an associated amount of load to be removed from the market, but the grid operator then would adjust capacity market clearing prices to reflect what they would have been had those resources remained in the market.
That approach is somewhat similar to one of PJM's original proposals that FERC rejected. But instead of relying on a complicated proxy system for setting a final market clearing price, PJM's new proposal would set that price based on actual offers that are cleared to meet total load, including the load associated with the carve-outs. The idea is that by boosting demand in the capacity market to reflect the departed RCO load, but not having the RCO supply participate in the market, capacity market clearing prices would be closer to what they would have been absent the state subsidies.
Comments
Many of the comments on PJM's proposal reflected those submitted in response to FERC's June order, with some opposed to any extended RCO or FRR option and demanding a "clean" MOPR and others supporting the carve-outs.
Exelon Corp., which owns nuclear units receiving state subsidies, said fossil-fuel generators' insistence on a clean MOPR that does not allow any resources to serve load outside PJM's capacity market would raise capacity bills in one PJM region covering New Jersey, Delaware and Maryland alone by $700 million, or 37%, annually due to over-procurement. The company also reminded the commission that states always have had the right to choose how their load procures capacity, including through bilateral contracts. The only difference with the FRR alternative is that it allows states "to make a more tailored policy choice" in that regard, Exelon stated.
As for arguments that a resource-specific FRR would create inefficiencies by replacing lower-cost generation with higher-cost, state-supported generation, Exelon said emitting generators "only appear more efficient because they are not internalizing the costs of their pollution."
Exelon took specific aim at PJM's proposal to reprice the auction results as if the same amount of load is served by a supply stack that does not include the subsidized resources. Doing so would increase costs to customers in that same eastern PJM region by as much as $2.2 billion annually and PJM-wide by approximately $2.6 billion annually, Exelon asserted.
"PJM's repricing proposal not only is punitive to customers, but also is based on the same flawed premise as the MOPR-only approach: that the only just and reasonable price is the one that would result if all load were required to procure capacity through an auction construct that overrides state policies differentiating between emitting and non-emitting generation," Exelon said.
In contrast, the Electric Power Supply Association, or EPSA, continued to insist on only a clean MOPR. Allowing resource carve-outs will only "negate the benefits of an expanded MOPR and thus perpetuate the price suppression problem" that FERC found to be unjust and unreasonable in the June order, the trade group maintained.
"PJM has not even attempted to quantify the price suppression that would actually be eliminated by the combination of its expanded MOPR and RCO or to explain why the price suppression that will remain is just and reasonable," EPSA continued. FERC "needs substantially more than PJM's 'say-so' before it can find the level of price suppression preserved under the RCO to be just and reasonable."
If FERC nevertheless wants to adopt the FRR alternative, EPSA said it should not do so without also adopting the extended RCO alternative or a similar mechanism and subjecting the bilateral transactions between affiliates to FERC's rate review procedures.
In contrast, FirstEnergy Solutions Corp., which owns coal-fired power plants, said PJM's extended RCO proposal, with a few tweaks, is "a reasonable means" of accomplishing the goals articulated by FERC. However, it strongly opposed PJM's plan to mitigate previously subsidized resources in perpetuity, which would effectively preclude a resource that chose the extended RCO option from reentering the PJM capacity market even if it no longer is subsidized.
NRG Power Marketing LLC said anything but a clean MOPR would essentially result in re-regulation of a substantial portion of the competitive wholesale market. And citing a PJM scenario analysis, NRG said if 6,000 MW of capacity had entered a recent capacity auction as price takers, capacity prices in PJM would have gone from $140.00 MW/day to $92.08 MW/day, threatening the viability of the company's coal-fired power plants.
Moreover, the company said the FRR and extended RCO alternatives would encourage state regulators to exercise buyer-side market power by putting certain high-cost generation resources into rate base because the price suppressive impacts of doing so could more than offset the cost of the subsidies to the state's consumers.
In contrast, a group of stakeholders that included environmentalists, consumer advocates and industry interests noted that the only parties arguing against the concept of balancing an expanded MOPR with adoption of a resource-specific FRR mechanism "are the companies that have brought — and lost — legal challenges to the states' authority to implement clean energy programs."
"In order for the PJM market to continue to work for states and their customers, the commission must ensure that market rules account for the presence of state-supported resources, by meaningfully recognizing the capacity that these resources in fact provide the system and not punishing states for taking actions to support their clean energy goals," the group stated. (FERC dockets EL16-49, ER18-1314, EL18-178)
