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FERC to PJM: Set new capacity market rules addressing state clean energy goals

A divided Federal Energy Regulatory Commission voted Dec. 19 to approve a draft order aimed at countering the price-suppressive effects of state-subsidized clean energy resources in the PJM Interconnection capacity market.

The draft order expands what is known as PJM's minimum offer price rule, or MOPR, which sets an administratively determined price floor for certain generators bidding into a capacity market that is designed to ensure resource adequacy for 65 million customers in all or part of 13 states.

PJM's long-running capacity market proceeding (FERC dockets EL16-49, EL18-178) dates back to 2016 when a group of competitive power suppliers, including Calpine Corp., submitted a complaint seeking to have PJM's MOPR apply not just to new natural gas resources but also to existing generating units that receive out-of-market subsidies.

In June 2018, FERC determined that PJM's capacity market rules were unjust and unreasonable because they failed to protect the capacity market from the price-suppressive impacts of out-of-market support provided by states to certain resources, such as renewable and nuclear generation. More than a year later, a divided commission ordered PJM to further postpone its already-delayed capacity auction for the 2022/2023 commitment period until it could hash out new rules covering how state-supported resources should be treated.

Speaking during the commission's Dec. 19 monthly open meeting, Republican Chairman Neil Chatterjee said FERC's draft order builds on a "MOPR-Ex" proposal submitted by PJM in April 2018.

Under the Dec. 19 draft order, all new resources seeking to participate in PJM's capacity market that receive a state subsidy will be subject to review under an expanded MOPR, Chatterjee said. However, the chairman added that the order also includes grandfathering provisions that exempt existing renewable resources participating in state renewable portfolio programs, existing demand response resources, existing energy efficiency and storage resources, existing self-supply resources, and other competitive resources that do not receive state subsidies.

Among other things, the draft order also apparently scraps the idea — referred to as a fixed resource requirement option — of having PJM allow utilities to acquire the capacity needed to meet just some of their customers' needs through bilateral contracts instead of having to do so through PJM's capacity market. Utilities in the PJM have always had the option of using bilateral contracts to obtain their capacity, but very few have done so because the existing rules require them to obtain either all or none of their capacity through the capacity auctions. The FRR alternative would have done away with that all-or-nothing requirement.

While Chatterjee asserted that the order was aimed at maintaining competition within the PJM capacity market, Democratic Commissioner Richard Glick argued that it actually does the opposite by favoring existing generation over newer, cleaner resources.

In a lengthy statement, Glick said during the meeting that the order would effectively apply to every new generating facility in New Jersey, which has an aggressive renewable portfolio standard as part of its ambitious climate goals. He also warned that the order threatens to effectively "blow up" the business model of municipal utilities and cooperatives that procure their own generating resources.

Calling the draft order's definition of state support "vague," Glick nevertheless said he believes that the MOPR would apply to generation resources that benefit from carbon pricing under the Regional Greenhouse Gas Initiative, which in 2020 will count Maryland and New Jersey as participants. Pennsylvania, another PJM member state, also has begun crafting rules to join the regional cap-and-trade program for CO2 emissions from the power sector.

While the order would exempt about 5,000 MW of existing renewable generation within PJM's footprint, it also would raise the minimum offer price for 38,000 MW of planned renewable capacity, Glick noted. Based on his advisers' understanding of the order, Glick said his team conservatively predicted that the expanded MOPR could result in $2.4 billion annually in increased consumer capacity costs.

The Dec. 19 draft order gives PJM 90 days to submit a compliance filing, which is to include an estimate for when the grid operator plans to conduct its auction for the 2022/2023 commitment period and how it expects the new rules to impact future capacity market auctions.