FERC rejects PJM capacity market reform proposals, seeks quick resolution
In a 3-2 decision that drew sharp dissent from two commissioners, the Federal Energy Regulatory Commission late Friday rejected both of PJM Interconnection’s proposals to address failures in its capacity markets due to state subsidies supporting preferred generation resources.
Whether to add more renewable energy or to keep struggling emissions-free nuclear online, many states are increasingly supporting power plants that might not be economic but provide the clean energy needed to meet renewable portfolio standards and other policy goals.
State policies that support these plants are intruding into wholesale markets, ultimately depressing capacity prices, opponents argue. But a solution has been hard to come by. In March, FERC approved capacity market reforms proposed by ISO-New England, setting the stage for contentious decisions over similar proposals from other grid operators in the months to come.
FERC’s order rejecting the various proposals to update PJM’s capacity market exposed a commission sharply divided over several issues, including how much control states will have on their generation mixes. The decision sets PJM Interconnection on a rapid course to adjust its market to find an equitable method of incorporating all of these resources.
As renewables and cheap gas threaten not just coal plants but also nuclear facilities, how wholesale markets incorporate preferred resources could mean the difference between retirement and availability for some plants, as well as the extent of renewables development.
The commission sided with Calpine Corp. and found PJM’s current tariff to be unjust and unreasonable — because it failed to mitigate the price-suppressive impacts of out-of-market payments to generators. But regulators also rejected solutions proposed by PJM and Calpine, and instead called for an expedited paper hearing to consider a fix that would include expansion of the Minimum Offer Pricing Rule (MOPR) to apply to new and existing resources that receive support.
In a paper hearing, FERC limits its reviews to the paper record. The minimum offer rule is intended to prevent the exercise of buyer-side market power and ensures resources are offered on a competitive basis. But, the argument goes, the state’s out-of-market payments are distorting that offer price.
The commission rejected both proposals filed by PJM — a two-part capacity repricing scheme and revisions to the MOPR that aimed to mitigate capacity offers from new and existing resources, subject to certain proposed exemptions (MOPR-Ex). Regulators also rejected proposed interim tariff revisions proposed by Calpine to extend the MOPR to a “limited set of existing resources,” but said they were unsure of the best solution.
“We are unable to determine, based on the record of either [the Calpine or PJM] proceeding, the just and reasonable rate to replace the rate in PJM’s Tariff,” FERC wrote. But the commission said the problem is clear: “Over the last few years, the integrity and effectiveness of the capacity market administered by PJM … have become untenably threatened by out-of-market payments provided or required by certain states for the purpose of supporting the entry or continued operation of preferred generation resources that may not otherwise be able to succeed in a competitive wholesale capacity market.”
Commissioners Cheryl LaFleur and Richard Glick, the two Democrats on the commission, each dissented for a variety of reasons, including FERC’s fundamental rejection of PJM’s rates and the expedited way in which it proposes to replace them.
Expedited alternative review
The commission consolidated PJM’s proposal docket with Calpine’s complaint and set the proceeding for a paper hearing under Docket No. EL18-178-000. In that proceeding, stakeholders will, on an expedited basis, consider a proposed solution where PJM would modify two existing aspects of the tariff, including adjustments to the grid operator’s MOPR to address price suppression.
The hearing will consider adjusting the MOPR to apply to new and existing resources that receive out-of-market payments, regardless of resource type, and the commission said it “would include few to no exemptions.”
FERC’s order explains that the proposal would also establish an option in PJM’s tariff to allow, on a resource-specific basis, resources receiving out-of-market support to choose to be removed from the PJM capacity market,
along with a commensurate amount of load, for some period of time.
“That option, which is similar in concept to the Fixed Resource Requirement (FRR) that currently exists in the
Tariff, is referred to this order as the FRR Alternative,” FERC said. “Unlike the existing FRR construct, the FRR Alternative would apply only to resources receiving out-of-market support.”