Federal Judges Hear Arguments Against PJM Market Rules
The D.C. Circuit Court of Appeals heard oral arguments this week on the various challenges to the Federal Energy Regulatory Commission (FERC) approval of capacity market rules for PJM, the electric grid operator serving 61 million electricity customers in the Mid-Atlantic and Midwest. PJM’s new rules are controversial because they funnel billions of dollars from those electricity consumers to fossil and nuclear power plants and largely exclude competition from economical, reliable wind and solar power and demand response (paying volunteers to cut electricity use when the grid is stressed).
The oral arguments followed a round of legal briefs. Fundamentally at issue is whether FERC, in approving PJM’s rules, satisfied its mandate to ensure that the rules would result in reasonable rates to consumers and would not preference certain energy resources over others without good reason. FERC’s approval, under federal law, must be rationally based on the evidence before it, and it must explain its reasoning. A diverse group of stakeholders—including state oversight agencies, rural electric cooperatives, public power, and clean energy advocates—argued that FERC failed to do any of this.
What is PJM’s capacity market?
PJM runs a market that determines which energy resources (coal, gas, nuclear, demand response, and wind and solar power) will supply the region’s future power. The commitment to supply electricity or reduce its consumption in the future is the “capacity.” In theory, the market is supposed to competitively determine which resources the PJM region should invest in to ensure that the electricity supply is sufficient to meet future demand.
PJM’s controversial new rules
PJM’s capacity market has operated reliably since its inception in 2007, and clean energy participation has been growing in that market, helping to keep prices low and protecting the region from fossil fuel price volatility. The 2014 polar vortex tested PJM’s system—it was so cold that coal piles froze and poorly maintained gas plants could not operate. Even so, PJM had sufficient resources to preserve reliability throughout that winter and again in the winter of 2015 when polar vortex conditions returned. By then, PJM and plant operators had mostly addressed the reasons for the power plant failures through weatherization and maintenance. Nevertheless, the experience prompted PJM to adopt a sweeping overhaul of its capacity market rules. The new rules require that all capacity resources be available to perform whenever called on, 365 days a year. Perversely, these new rules will hurt the very resources that were critical to ensuring reliable grid operations during the polar vortex, such as strong winter winds and demand response.
Seasonal supply can more economically and reliably meet seasonal demand
While this always-available, all-year requirement is superficially resource neutral, it disadvantages or excludes resources that perform reliably and economically in the winter (like wind) and the summer (like solar and smarter use of air conditioning) but not necessarily all year. Requiring all resources to be available at the same level 12 months a year ignores the fact that both electricity demand and economical, emissions-free and fuel-free supply in PJM are seasonal in nature.
Both supply and demand peak in the summer—for example, it’s cheaper on the hottest summer days (when everyone is running the AC at full blast) to pay willing customers to curtail or shift electricity use instead of firing up backup power plants, which tend to be expensive, inefficient, and highly polluting in order to accommodate greater electricity demand.
Source: Wilson Economics – enabling wind, solar, EE (energy efficiency) and DR (demand response) to compete for seasonal capacity commitments (“Summer 90/10” and “Winter 90/10”) would help avoid over-procuring traditional generation (in royal blue) in the winter or off-peak seasons.
Eliminating seasonal resources and only procuring annual resources could further inflate costs to consumers by the billions of dollars, as shown by our analysis and PJM’s market monitor’s analysis, both by over-procuring capacity during the off-peak seasons and by restricting competition in the capacity market to expensive fuel-burning power plants.
There is nothing magical about 365-day availability—PJM could ensure year-round reliability with seasonal resources by procuring capacity for four, six, or eight months at a time—that is, by covering the year with commitment periods that more closely track the seasons. (For example, PJM’s rules previously enabled procuring summer-only capacity, and the New York grid operator procures capacity in six-month chunks.) Changing this one arbitrary requirement (PJM could even keep the other features of its new rules) to allow for capacity procurement on a seasonal basis would more flexibly procure economical, clean, and reliable resources, such as solar, wind, and customers’ smarter use of air conditioning while avoiding costly and wasteful over-procurement in the off-peak seasons.