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Renewables face 2020 challenges that could end Eastern capacity markets

Highlights

Mandatory capacity markets' role in resource adequacy in question

'Capacity markets seemingly impertinent to renewables:' analyst

Washington — Renewable energy developers on the East Coast face an uphill battle in 2020 to secure capacity payments as new wholesale power market rules have the potential to force them out of the market.

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Commodities 2020 | S&P Global Platts

Possibly more daunting than the hurdle this presents for the transition to a clean energy economy is the potential for market rule changes approved by the Federal Energy Regulatory Commission to be the beginning of the end for mandatory capacity markets in the Eastern regional transmission organizations.

"It may well be that a mandatory capacity market is no longer a sensible approach to resource adequacy at a time when states are increasingly exercising their authority under the [Federal Power Act] to shape the generation mix," Commissioner Richard Glick said in his stinging dissent to FERC's December 19 order (EL18-178) expanding application of the minimum offer price rule (MOPR) in PJM Interconnection to all new resources receiving state subsidies.

"Indeed, the conclusion that I draw from the record in front of us is not that there is an urgent need to mitigate the effects of state public policies, but rather that we should be taking a hard look at whether a mandatory capacity market remains a just and reasonable resource adequacy construct in today's rapidly evolving electricity sector," Glick said. "It is a shame that we have not spent the last two years addressing that question instead of how best to stymie state public policies."

HARMONIZING MARKETS, STATE POLICY

Ryan Katofsky, a managing director with the trade group Advanced Energy Economy, said a theme that will dominate utility regulators' workload in 2020 centers around "finding ways to harmonize state utility regulation and wholesale electricity markets with increasingly ambitious state climate and clean energy goals."

Growing interest in 100% clean energy goals will "ultimately require a comprehensive review of how business is done today and whether that is compatible with achieving the target," Katofsky said during an AEE year-in-review webinar.

He noted the New York Public Service Commission's investigatory proceeding into resource adequacy, citing potential challenges with the compatibility of the current wholesale capacity market with the state's renewable energy and greenhouse gas reduction targets. Reply comments in that proceeding are due January 31.

Glick asserted during the commission's December 19 meeting that the NYPSC was mulling taking back resource adequacy responsibility from New York Independent System Operator over "concerns about FERC." Utility regulators in two states have also "suggested that, given where FERC's gone, maybe they should require their utilities to get out from under PJM," he said.

He told reporters after the meeting that FERC "absolutely" should be concerned that states may flee the organized markets as state policymakers "think this is commission run amok."

MARKET REFORMS

FERC's response to the increasing volume of generation backed by out-of-market state revenues seeking to participate in the competitive wholesale markets has riled certain states, the renewables industry and environmental groups.

In both ISO New England and PJM, FERC has given the nod to capacity market redesigns premised on a MOPR. That market mechanism relies on administratively set -- and artificially high, according to critics -- price floors. Traditional resources, such as coal and gas-fired generators, are generally not subject to the MOPR and able to bid lower, effectively forcing state-supported renewables out of the market.

"Despite having very different ways of accommodating subsidized resources, the capacity markets in ISO-NE and PJM face a similar problem in that subsidized resources are developed independent of market signals," Kieran Kemmerer, a power market analyst with S&P Global Platts Analytics, said in an email.

ISO-NE's first auction run under competitive auctions with sponsored policy resources (CASPR) rules, held in February for the 2022-23 delivery year, produced the lowest clearing price in six years at $3.80/kW-month, an 18% decline from the prior-year's auction. Notably, Vineyard Wind's 800-MW offshore wind project being developed to help meet Massachusetts' clean energy goals was only able to secure an obligation for 54 MW in the substitution auction.

"In order for more subsidized resources to enter ISO-NE's capacity market, resources with the intention of retiring must first clear the auction," Kemmerer said. "In a capacity market with low clearing prices and significant reserve margins, it will take a significant amount of existing capacity retirement for this solution to ever be effective."

In PJM, a revised and expanded MOPR, while providing a limited set of exemptions for certain existing resources, is expected to force many renewables out of future capacity auctions while making the region's power system more expensive for consumers.

It remains unclear when PJM's auctions will restart, but the earliest date appears to be during the third quarter of 2020 with the potential to slide into 2021.

'NEW PATH'

Both PJM and ISO-NE "exhibit oversupply, and states with aggressive renewable policy are not willing to wait for resource retirements, in a sense making capacity markets seemingly impertinent to renewables," Kemmerer said.

"In the event that states were willing to wait for resources to retire and market forces to take effect, then this decision would certainly have more bearing as it would be more difficult to transition from a fully-subsidized to economic model," Kemmerer said. "That being said, under existing market rules (non-associated with subsidies), the capacity payments for partially-subsidized resources like onshore wind and solar are low to begin with."

In 2020, the focus must be "toward charting a new path forward to solve the problem that market advocates have identified, but in a way that supports and enables clean resources rather than trying to exclude them," Kathleen Spees, a principal with the economic and regulatory consultancy The Brattle Group, said at an industry forum.

Charting this new course, however, is complicated by the difficulty inherent in getting states to align on policy. "For example, trying to use market-based mechanisms such as carbon pricing in New England did become very, very much an exercise in futility because the states have very different policy objectives," Spees said.

Commodities 2020 | S&P Global Platts

-- Jasmin Melvin, jasmin.melvin@spglobal.com

-- Edited by Rocco Canonica, newsdesk@spglobal.com