The ‘stealth NOPR?’ PJM CEO says market reforms are no bailout for coal
Some experts are concerned pending reforms in the nation’s largest electricity market could have similar results to a Trump administration subsidy plan rejected by federal regulators.
ending price reforms in the nation’s largest wholesale electricity market are stoking concerns of a low-profile bailout for aging coal and nuclear plants.
The Federal Energy Regulatory Commission in January rejected a plan from the Department of Energy to support such generators. Now, the CEO of the PJM Interconnection is trying to assure the sector that proposed reforms to its power markets would not have the same effect.
“This was never about trying to save plants that don’t run,” PJM CEO Andy Ott told Utility Dive. “That word ‘resilience’ that was used on the DOE side is just not the same [as what we’re doing].”
The DOE’s Notice of Proposed Rulemaking (NOPR), filed last September, would have provided cost recovery to merchant power plants that keep 90 days of fuel supply onsite, largely benefiting coal and nuclear generators. DOE and its allies in those sectors argued the plants are essential for the resilience of the power system — the ability to “bounce back” from outages.
FERC regulators threw out the 90-day provision in their ruling, saying DOE did not prove that existing market rates are unreasonable, nor that their solution would improve them. But they also validated DOE’s concern about system resilience, asking regional grid operators to report back in 60 days on how to improve it.
Some industry observers are concerned those filings, along with ongoing efforts to reform power market rates, could amount to a “stealth NOPR” — higher payments to many of the same generators that would have benefited from the DOE proposal.
The conversation centers on the PJM’s efforts to reform price formation in its energy and capacity markets. While those plans predate the DOE NOPR, some market observers are concerned they would have a similar effect.
“If [a reform] results in a larger payment in the energy market to inflexible units it could have many of the same impacts as the NOPR … and that’s what led to me to think of it as a stealth NOPR.”
Professor of Law, University of Richmond
“If [a reform] results in a larger payment in the energy market to inflexible units it could have many of the same impacts as the NOPR without being done by a FERC rule, and that’s what led to me to think of it as a stealth NOPR,” said Joel Eisen, an energy law professor at the University of Richmond. “The same inflexible generators get that would have benefited by the resilience NOPR … stand to benefit by the way price formation would be defined here.”
“Let’s also not forget the swath of capacity market reforms that PJM has put forward,” Robbie Orvis, director of energy policy design at think tank Energy Innovation, said in an email. “Together with [energy market] price formation reform, these changes will undoubtedly increase revenue for coal and nuclear generators, though admittedly other units as well.”
Some FERC regulators have weighed in as well, warning regional grid operators proceed with caution on energy market reforms, respect state input on capacity repricing and keep their resilience docket filings — due March 9 — away from plant bailouts.
Ott says many of the bailout concerns stem from a “lack of information” about the grid operator’s proposed reforms. In a Tuesday interview with Utility Dive, he offered new insights into PJM’s plans for energy and capacity market changes, as well as its upcoming resilience filing.
Energy market reform
Of PJM’s proposed market reforms, changes to its energy market have attracted the most scrutiny for bailout concerns.
Floated in a staff white paper last November, PJM’s plan would alter market rules to allow large, inflexible units to set the locational marginal price (LMP) that forms the foundation of the day-ahead and real-time energy markets.
Currently, the next resource that can respond to a price signal is allowed to set the LMP — typically gas plants that can vary their output. The PJM proposal would allow coal and nuclear plants to set LMP as well, raising energy market prices between 2% and 5% by the grid operator’s estimate.
PJM says the pricing reforms are needed to reduce uplift — payments given to generators when the LMP does not reflect the cost of serving load. But some critics are concerned it could amount to a plant bailout.
“It is accomplishing many of the same objectives,” as the DOE NOPR, Eisen said. “By allowing inflexible units to set locational marginal price, it would arguably reduce uplift but would also result in higher payments to generators.”
Ott said those concerns stem from a misunderstanding of what the grid operator hopes to accomplish with energy market reforms. The proposal was intended to combat uplift payments, he said, but was pulled into the conversation on the DOE NOPR when the department referenced it in its filing and FERC highlighted it in its rejection decision.
“We owe the stakeholders a more refined articulation of the problem,” Ott said. “There was the DOE report [on grid resiliency] and then the DOE NOPR and then what we were saying, so the issue got very muddled.”
A new cold weather report issued by PJM this week aims to provide that refined articulation, Ott said. Its analysis of a cold snap that gripped the grid operator’s territory in January showed that uplift payments rose to $4 million a day, an 11-fold increase over previous years.
“That should help people get an idea of what we’re trying to solve and maybe get rid of some of this noise about is there a conspiracy theory,” Ott said, “because it’s really, truly about making sure the prices that we calculate reflect the units that are operating, simple as that.”
Current energy market rules that allow only flexible units to set LMP were made due to computational limitations in market software when PJM was being set up in 1998, Stu Bresler, PJM’s vice president for operations and markets, said in a December podcast interview. Ott stressed that the energy market proposal aims to correct that issue, and would not amount to keeping plants online that would otherwise retire.
“Only generators that are actually running get paid [the] energy price, so this is not a veiled attempt to save plants that never run, because obviously if we change the energy price formation you have to actually produce energy for that to affect you,” he said. “I think the DOE NOPR, the notion of trying to save plants, was geared toward saving plants that are on their way to retirement.”
Orvis said that analysis “doesn’t tell the whole story.” While it wouldn’t benefit plants that aren’t running, the proposed LMP rules would still raise revenues for generators that run only infrequently, likely pushing them to change their bidding behavior to increase their output.
“In particular, the price formation proposal appears as if it will mostly benefit units during times of low load, when inflexible generators are more likely to be a larger share of load, and setting the price under the new proposal,” Orvis wrote. “That conclusion points to increased revenues for coal and nukes in particular, which often run during off-peak hours.”
Whether those increased revenues would be enough to keep marginal plants online remains unclear. Jeremy Harrell, policy director at the conservative clean energy think tank ClearPath, said it is unlikely for many of the plants targeted by the NOPR.
“What PJM’s putting forth is not a NOPR-lite.”
Policy Director, ClearPath
“You’re not going to see what PJM has proposed to be a difference-maker for a coal power plant that is going to retire otherwise,” he said….