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PJM stakeholders tackle questions on FERC capacity market order

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PJM stakeholders tackle questions on FERC capacity market order

PJM Interconnection stakeholders will have another opportunity to develop some consensus on reforms to the grid operator's capacity market now that the Federal Energy Regulatory Commission has extended a deadline for comments.

Stakeholders have broadly disagreed on how PJM can fix its capacity market to keep it competitive while respecting state policies that prefer certain resources. Questions related to implementation of a proposed solution from FERC and the definition of material subsidies will continue to be hot topics as PJM holds a third stakeholder meeting Sept. 11.

FERC on June 29 issued an order (FERC docket EL18-178) addressing the growth of state policies, such as renewable portfolio standards and zero-emission credits for existing nuclear plants, that can interfere with competitive power markets. Its original deadline for comments was Aug. 28, but the commission on Aug. 22 extended that deadline by more than a month, to Oct. 2.

Aside from the individual renewables standards, two states in the PJM markets, Illinois and New Jersey, have adopted so-called zero-emission credit programs since 2016 to help existing nuclear plants recover their costs. Other states have been considering similar programs. The FERC order identified a problem with payments received outside of wholesale power markets, called "out-of-market" payments, that could allow subsidized resources to bid below their operating costs and artificially lower market prices and revenues for competitors.

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FERC in the order said action is needed to prevent customers from paying for the same capacity through both the market and any state-approved subsidies.

"I think FERC is trying to find a way to accommodate state programs to mitigate the possibility that ratepayers will have to pay twice," Ari Peskoe, director of the Electricity Law Initiative at Harvard Law School, said in an interview. "That is the key concern that FERC is trying to address here."

FERC's order rejected two approaches PJM staff proposed in April, finding them both unjust, unreasonable and discriminatory. One of those solutions, called capacity repricing, would have split the capacity market into two stages where the second stage would reprice the bids of certain subsidized resources to ensure they are competitive. The other solution, devised by PJM's independent market monitor, Monitoring Analytics, would have employed an extended minimum offer price rule, dubbed "MOPR-ex," to prevent new and existing resources receiving out-of-market payments from offering below their costs.

The order also denied a similar extended MOPR proposal outlined in a March 2016 complaint by independent generators Calpine Corp., Dynegy Inc. and NRG Energy Inc.

Hot topics

One subject up for continued debate at the Sept. 11 meeting is the issue of implementing a "fixed resource requirement," or FRR, alternative that FERC recommended as a possible solution. PJM, during an Aug. 15 meeting, called the option a "resource-specific carve-out."

FERC's solution addresses state subsidies by requiring both existing and new resources to be subject to a MOPR that requires them to bid in at a minimum level representing their operating costs, with few or no exceptions. Those subsidized resource owners that cannot get a waiver to the MOPR would also have the option to elect the FRR alternative. That option would let a subsidized resource remove its capacity, along with an associated amount of load, from the auction and sell that capacity outside the market.

"An interesting issue is if [the FRR alternative] does get implemented by PJM and FERC, what would states need to do to respond?" Peskoe said, agreeing that the option may be more complicated for certain states with a lot of resources implicated.

"I would be very surprised if there is any stakeholder vote that goes in one direction. I mean, people are going to be all over the map on this," Peskoe added.

Another issue still up for consideration is how material, or "actionable," subsidies should be defined. PJM staff, in an Aug. 15 presentation, defined resources with actionable subsidies as those with at least 20 MW of capacity and receiving an out-of-market payment that equates to more than 1% of actual or anticipated market revenues. Resources receiving federal subsidies that were adopted after March 21, 2016, the date Calpine filed its complaint, also would be affected and subject to the MOPR, PJM said in an Aug. 20 blog post.

Generators lean against FRR option

Competitive generators generally have opposed the FRR alternative, citing implementation challenges.

Calpine, NRG Energy and Vistra Energy Corp. either oppose the FRR alternative or view it as the least optimal solution, according to their individual comments to PJM. Meanwhile, an advocacy group for competitive generators called the PJM Power Providers cited an expert who found that a unit-specific FRR approach could suppress market prices and instead supported an extended MOPR.

Calpine in its comments said it feared that letting subsidized resources exit the capacity market could shrink the capacity market into a residual market. Calpine supported options that included a strong MOPR and a two-tiered structure similar to one that FERC approved for the ISO New England called the Competitive Auctions with Sponsored Policy Resources.

PJM's executive director of market operations, Adam Keech, said the grid operator would not pursue an approach like ISO-NE's but still is considering a repricing step in its proposal to FERC.

Other generators such as Exelon Corp. see potential opportunities in the FRR alternative, depending on its design. "We are encouraged that FERC has now said that all assets receiving out-of-market payments should be treated the same," Exelon President and CEO Chris Crane said Aug. 2 during the company's second-quarter earnings call. "The implementation details will matter, but we believe that the partial FRR design could allow states to advance their energy policy goals, which we think is critical to ensure the needed reduction in carbon emissions."

Kathleen Barrón, Exelon's senior vice president of governmental and regulatory affairs and public policy, sees the FRR alternative as a short-term fix until a more long-term carbon solution like carbon pricing comes around.

Despite the uncertainty over what approach FERC ultimately will approve, Vistra President and CEO Curtis Morgan said during the company's second-quarter earnings call Aug. 6 that "PJM and FERC are going to come up with a solution that will be either net neutral [or positive]. I just can't imagine them agreeing to something that, when you model it out, would be negative to where we are today."

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