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Power producers call $5.7B cost estimate for PJM market changes 'disingenuous'

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Power producers call $5.7B cost estimate for PJM market changes 'disingenuous'

Independent power producers and marketers are pushing back on claims that proposed changes in the PJM Interconnection capacity market could cost consumers billions of dollars while limiting the participation of state-supported clean energy resources.

In a Sept. 6 letter addressed to 10 Democratic U.S. senators, the Electric Power Supply Association, or EPSA, asserted that a recent report by Grid Strategies — a clean energy consulting firm that placed the cost of the proposed reforms at $5.7 billion annually — "cherry-picks" numbers from an earlier report that PJM's independent market monitor produced for a different scenario.

The Grid Strategies report was cited by the Democrats in an Aug. 29 letter addressed to Federal Energy Regulatory Commission Chairman Neil Chatterjee in which they urged the agency not to approve a PJM proposal that would apply a Minimum Offer Price Rule, or MOPR, to state-supported resources. In the letter, the senators told Chatterjee that it was their understanding that FERC's new 2-1 Republican majority is considering approving the proposed changes in the wake of Commissioner Cheryl LaFleur's departure at the end of August.

The issue dates back to June 2018, when a sharply divided FERC determined that PJM's capacity market rules were unjust and unreasonable and established a paper hearing (FERC docket EL18-178) to determine the appropriate way to move forward.

Several states in the PJM have established policies that subsidize the cost of certain clean energy resources, such as nuclear power plants and renewable generation needed to meet a state renewable portfolio standard. The problem, according to FERC's majority at the time, is that PJM's existing market rules were failing to protect the capacity market from the price-suppressive impacts of the out-of-market support being provided by the states to those resources.

The same order rejected two options the grid operator asked FERC to choose between for fixing the market rules. Instead, the agency floated its own proposed solution that called for PJM to eliminate virtually all exemptions to its MOPR, which was designed to prevent resources from gaming the system by bidding under their cost of production. Without the exemptions, most subsidized resources would have to bid their capacity into PJM without factoring in the cost savings from their subsidies.

PJM responded to the order with yet another proposal that would allow state-supported resources to opt-out of the grid operator's capacity market through a resource carve-out and engage in direct bilateral capacity commitments. The proposal also includes a repricing mechanism that would leave an exiting resource's corresponding demand in the capacity auction, effectively increasing prices. Resources that set the auction's marginal clearing price under those rules but are nevertheless not responsible for any capacity obligations would still receive compensation for participating.

'Apples-to-oranges comparison'

The analysis provided by Grid Strategies was based on the $95/MW-day increase included in a September 2018 PJM independent market monitor report discussing the impact of an extended resource carve-out in a scenario where all generation at high risk of retirement elects the resource carve-out option in the same auction. Noting that the calculation method was intended to estimate the cost of imposing the MOPR in the near-term when capacity supply is inelastic, Grid Strategies said prices would likely return to equilibrium over the longer-term as market participants build more capacity in response to higher prices.

However, EPSA, which represents merchant power producers and marketers, said in its Sept. 6 letter that relying on the independent market monitor study resulted in an "apples-to-oranges comparison and a startling cost estimate to the market that is both incorrect and disingenuous." The trade group specifically noted that the $5.7 billion figure was based on one of 14 scenarios included in the September 2018 report, while only two of the 14 scenarios resulted in price increases. Moreover, none of the scenarios int the report attempted to distinguish between subsidized and unsubsidized resources, EPSA added.

The group also faulted Grid Strategies for omitting the known costs of state subsidies, pointing to at least $2.2 billion paid to resources listed in the report. Those subsidies are allowing certain resources to bid into PJM's markets "well below their costs or at zero," rendering PJM's capacity rates unjust and unreasonable, EPSA said.

"If the policy goal is to achieve sustainable carbon reductions, policymakers should consider long-term, economy-wide solutions to a national and global issue instead of high-cost, one-off, temporary fixes that fail to meaningfully address the problem," EPSA concluded.

The group's letter marks the latest addition in a broader debate over the fundamental role that capacity markets should play in the face of increasingly aggressive state action on climate change. Moreover, PJM's latest capacity auction was supposed to have taken place in May, but a deadlocked FERC eventually allowed the grid operator to push it back to Aug. 14. With three of its four members chiming in with their own separate statements, FERC on July 25 ordered PJM to delay the auction further until the commission can establish a replacement rate that "will provide greater certainty to the market than conducting the auction under the existing rules."