Advanced Energy Perspectives

At FERC, PJM Capacity Market Rules are Up for Grabs, With Much at Stake for Advanced Energy Resources

Posted by Maria Robinson

Oct 11, 2018 1:24:00 PM

    

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PJM, the nation’s largest regional grid operator and the largest wholesale electricity market in the world, is at a crossroads: Can it run its markets while accommodating the ability of states to enact clean energy policies, or will it adopt new market rules that put the continuation of those policies at risk? With zero-emission credits (ZECs) supporting existing nuclear power plants in states like Illinois and New Jersey adding to the 29 states across the country already having renewable portfolio standards (RPS) that provide support in the form of renewable energy certificates (RECs) – and many of those states continuing to ratchet up RPS requirements – certain power plant operators have voiced concerns about what they see as “distortions” of the wholesale market. FERC is listening and making big moves. AEE is fully engaged in FERC’s proceedings, working to make sure that advanced energy resources are not disadvantaged in response.

On June 29, FERC issued an order asking PJM to make significant changes to its capacity market, a competitive auction process that ensures adequate resources are available on the grid when energy from them is needed to meet demand. This order came in response to concerns from traditional generators about “state subsidies,” namely RECs and ZECs, suppressing prices in capacity auctions. These generators, primarily gas and coal operators, say that RECs and ZECs push down capacity market prices to the point that the generators could not get capacity payments sufficient to stay in operation. PJM had previously offered two potential pathways for market revision (neither of which was supported by PJM’s stakeholders), but FERC rejected both proposals and instead initiated a new proceeding and offered a third path forward.

In this order, FERC directed PJM to revise its capacity market, specifically its Minimum Offer Price Rule (MOPR). PJM’s current MOPR sets a minimum bid price for a limited set of new generation resources to prevent new entrants from submitting artificially low prices. Currently, renewable, nuclear, coal, hydro, landfill gas generation, demand response, and energy efficiency are all effectively exempted, so that the MOPR mostly serves to prevent new natural gas generators from underbidding with artificially low prices to gain share in the capacity market. In its June 29 order, FERC proposed that PJM eliminate all exemptions from the MOPR, which would artificially and unfairly make numerous advanced energy technologies less competitive in capacity market bidding.

AEE objected to the June 29 order but, recognizing that some changes are likely to be adopted, filed comments by the October 2 deadline. In these comments, AEE voiced our concern that an overly broad application of the MOPR, as was suggested in the FERC order, will create significant barriers for new advanced energy technologies. AEE believes that any FERC-mandated expansion of the MOPR must be narrowly defined in order to prevent over-compensation for power plants allegedly disadvantaged by state policies.

In particular, AEE argued that RECs are not meaningful out-of-market revenues in the context of bidding into the capacity market. In a primer on RECs provided in our comments, AEE described how REC prices, which are subject to supply and demand in a market of their own, tend to be volatile and unpredictable, to the point where investors and lenders no longer consider RECs to be long-term, stable income for financing renewable energy projects. (This primer was cited by multiple other organizations in their comments.) Furthermore, the MOPR should not apply to voluntary RECs that are purchased to meet corporate clean energy goals, because they are not state mandated, nor do the purchasers receive financial benefit from a state for the purchase of RECs. AEE emphasized that the voluntary market for RECs is growing rapidly, as corporate demand for clean energy continues to increase in the PJM region.

AEE also noted that certain other resources should be exempt from the MOPR, including demand response, energy efficiency resources (EERs), resources procured via competitive solicitation processes, and seasonal capacity resources. Demand response, in particular, faces an unusual cost structure where DR resources are charged for their retail peak capacity demand via retail passthroughs of PJM’s wholesale capacity charges; demand response is the only technology that faces these upfront charges. Both demand response and EERs are likely to have MOPRs near or at zero, with demand response’s capacity price being negative due to the upfront charges its faces. The administrative burden of developing a MOPR structure for these technologies is high when the technologies could simply be exempted from the MOPR.

AEE also cautioned the Commission that vertically integrated utilities should not be exempt from the MOPR, as they receive state-subsidized out-of-market support in the form of guaranteed rate of return, which causes price suppression in the market as well. If the goal of these rule changes is to prevent price suppression, vertically integrated utilities should not be exempt from the MOPR either.

Should PJM and FERC nonetheless plow ahead with a broad MOPR that applies to RECs and other advanced energy resources, AEE emphasized that the calculation of the precise MOPR price to be applied to such resources must reflect their declining costs and individual technical characteristics. Applying the existing MOPR – developed to apply to traditional legacy generation technologies – to advanced energy technologies would not accurately reflect their current cost-competitiveness in the marketplace.  

In its comments, PJM offered a new proposal, on which the public has 30 days to provide reply comments. At first glance, PJM has proposed an expansive MOPR that would apply to all capacity resources receiving material subsidies, with only a limited exception for so-called “self-supply” resources held by vertically integrated or publicly owned utilities – just the opposite of AEE’s comments, where we seek a narrower MOPR and more exceptions. We will now prepare our own reply comments in opposition to the broad-MOPR approach, and look forward to seeing the direction of comments from others in November.

Download PJM Capacity Market Comments 

Topics: Wholesale Markets, Regulation

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