FERC Nixes PJM’s Fixes for Capacity Market Besieged by Subsidized Resources
In a 3–2 decision, the Federal Energy Regulatory Commission (FERC) rejected approaches filed by PJM Interconnection to reform its capacity market, whose integrity and effectiveness has been increasingly and “untenably threatened” by state subsidies for preferred generation resources, the federal regulatory body acknowledged.
The June 29 order sharply divided the commission, prompting Democrat Commissioners Cheryl LaFleur and Richard Glick to issue separate dissents. The Commission’s majority (which includes Commissioner Robert Powelson, who announced on June 28 he would leave FERC by mid-August) determined that PJM’s existing Minimum Offer Price Rule (MOPR) renders the grid operator’s tariff “unjust and unreasonable.” However, FERC left the issue unresolved for now, saying it was unable to make a final determination regarding a “reasonable replacement rate” for PJM’s tariff based on the existing record.
The commission instead preliminarily found that modifying two aspects of the PJM tariff “may produce” a just and reasonable rate. To supplement the record, it consolidated filings from dockets related to Friday’s decision and initiated a paper hearing to allow for submission of “additional arguments and evidence.” It plans to make a final decision by January 2019.
Industry experts Raymond Gifford and Matthew Larson, who are partners in the Denver office of the Wilkinson Barker Knauer LLP law firm, called the order “seismic.”
“At first blush, the order amounts to a finding that state ‘around market’ actions and other patches have overrun the market itself. It puts in place a tall directive for PJM to analyze, repair and likely redesign the capacity market construct—basically by the end of the summer.” However, the commission’s decision “should not be viewed as surprising,” they added. “The path of continued ‘around market’ and ‘in-market’ interventions was bound to lead one or more of the fully restructured markets to this moment someday. For PJM, the time is now.”
A Flood of State Subsidies
The order stems from concerns that the amount and type of generation resources receiving out-of-market support has increased substantially, evolving beyond small-scale renewables to thousands of megawatts from larger nuclear units. More states in PJM’s 13-state region are meanwhile considering providing more support based on an “ever-widening scope of justifications.” The decision notes that these subsidies have a “suppressive effect” on the price of capacity procured by PJM through its capacity market, which is known as the Reliability Pricing Model (RPM).
The RPM is designed to enable PJM to ensure long-term grid reliability by procuring enough power supply resources to meet demand expected three years in the future, and incentivizing resources to deliver on demand during system emergencies. It also sets long-term price signals to attract investments. But according to FERC, out-of-market payments, whether made or directed by a state, allow supported resources to reduce the price of their offers into capacity auctions, causing artificially lower auction clearing prices—and kicking off an insidious spiral.
“As the auction price is suppressed in this market, more generation resources lose needed revenues, increasing pressure on states to provide out-of-market support to yet more generation resources that states prefer, for policy reasons, to enter the market or remain in operation,” FERC noted. “With each such subsidy, the market becomes less grounded in fundamental principles of supply and demand.”
PJM’s Tariff Is ‘Unjust and Unreasonable’
In response to increasing out-of-market support, several independent power producers (IPPs) joined Calpine Corp. in a March 2016–filed complaint (Docket No. EL16-49-000) alleging that PJM’s tariff—and more specifically, the tariff’s existing MOPR—is unjust and unreasonable because it does not address the impact of subsidized existing resources on the capacity market. Among other out-of-market payments, Calpine cited the Illinois zero-emission credit (ZEC) program, which is under review by the U.S. 7th Circuit Court of Appeals.
On Friday, FERC agreed with the generator. FERC determined that the existing tariff is unjust and unreasonable and unduly discriminatory. “It fails to protect the integrity of competition in the wholesale capacity market against unreasonable price distortions and cost shifts caused by out-of-market support to keep existing uneconomic resources in operation, or to support the uneconomic entry of new resources, regardless of the generation type or quantity of the resources supported by such out-of-market support,” it said.
However, FERC only granted Calpine’s complaint in part: While Calpine proposed interim and immediate tariff revisions to extend the MOPR to a limited set of existing resources, FERC did not accept Calpine’s remedies.
FERC: PJM’s Approaches Aren’t the Answer
The FERC order also addresses a second proceeding (Docket Nos. ER18-1314- 000, et al.)in which PJM filed two alternate proposals to revise its tariff under section 205 of the Federal Power Act (FPA). The proposals were designed to address the price suppressing effects of state out-of-market support for certain resources.
The first alternate approach—which PJM preferred, though the grid operator noted in filings that neither alternative gained the two-thirds affirmative sector vote required for endorsement, despite a lengthy stakeholder process—comprised a two-stage annual auction to replace the MOPR. The first stage would determine capacity commitments and no resource offers would be mitigated. In the second stage, offers from subsidized resources would be replaced with PJM-determined competitive offers, and the auction would be run again to set the final clearing price (also known as “capacity repricing”) for resources that were selected in the first stage.
The second alternate approach—which PJM urged FERC to consider only if FERC determined capacity repricing was unjust and unreasonable—would revise PJM’s 2006-established MOPR. The existing MOPR, which currently sets a price floor only for certain types of new natural gas–fired resources, does not address the price suppressive impact of resources receiving out-of-market support, as FERC noted in its order. PJM’s approach was to expand the MOPR so that it would apply to any type of generation resource that receives subsidies, with exemptions. The so-called “MOPR-Ex” approach would extend the geographic reach of the MOPR to apply to external capacity resources as well as internal capacity resources, without a resource size threshold.
However, FERC rejected both of PJM’s alternative proposals because they were not shown to be “just and reasonable, and not unduly discriminatory or preferential.”