Clean Energy Groups Urge FERC to Reconsider PJM Order

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August 2, 2018 by Miles Farmer, Clean Energy Advocate

A coalition of clean energy organizations is strongly pushing back on a recent move by the Federal Energy Regulatory Commission (FERC) that frustrates state climate action in the Eastern United States and threatens to raise prices for consumers across the region.

FERC issued an order on June 29 that could prop up unnecessary and expensive fossil fuel power plants by blocking wind, solar, nuclear, and other resources like energy storage supported by state climate policies from selling into one of the world’s largest power markets. This week, the Sustainable FERC Project, NRDC, Earthjustice, Sierra Club, and Environmental Defense Fund formally asked FERC to reconsider its order, signaling that the agency could be in for a tough legal battle if it continues with its misguided action.

In making this filing, we join states and consumer advocates across the region in urging FERC to reconsider and withdraw its order. We are also insisting that as long as the order stands, FERC must implement it in a manner that protects customers and states as much as possible. The stakes are high: FERC’s action could cost customers across the region billions of dollars while harming states’ ability to fight climate change.

Background on FERC’s order

What is PJM?

FERC’s order applies to the PJM regional grid operator, which runs the nation’s largest wholesale electricity market stretching from Illinois to New Jersey and down to North Carolina. Using the PJM Market, utilities in PJM can purchase electricity from power plants across the region to resell to their customers, like homes and businesses. In total, these utilities in PJM provide electricity to roughly 65 million people (and account for about one-fifth of the nation’s total electricity consumption).

PJM region

PJM region

In addition to operating a market for electric energy (physical electrons that power the grid), PJM also runs a capacity market. As journalist David Roberts explains in more depth here, capacity markets compensate power plants not for energy itself, but rather for availability. Suppliers get paid to commit to provide energy if necessary during times, like hot summer days, when the electric grid is under maximum stress.

Not all grid operator run a capacity market; in many regions of the country, states are responsible for ensuring a sufficient power supply. Regardless of whether the grid operator or the state is in charge of the power supply, the goal is to ensure a buffer (known as a reserve margin) of about 15 percent extra power above and beyond the system’s anticipated needs to account for unexpected increases in peak system demand – such as during extremely hot days when air conditioners are running full blast. However, PJM’s significantly flawed capacity market design (discussed more here) and other market factors have contributed to a vast oversupply of power plants in the PJM region. PJM’s markets are now propping up enough supply to provide a reserve margin of nearly 33 percent in summer 2018 (see p. 24 of the linked report). This oversupply means higher costs for consumers, who ultimately foot the bill for all these capacity payments, even when far more capacity is being procured than necessary to maintain a reliable, resilient system.

States climate policies shape the PJM power supply

Long before PJM organized its market under FERC’s supervision during the late 90s, states in the region were enacting policies to fight climate change, develop local clean power, and address other problems caused by pollution from the power sector. Ten of the thirteen states in PJM, plus the District of Columbia, have implemented Renewable Portfolio Standards (RPSs). RPS programs set targets for a portion of electricity needs to be met by renewable sources, encouraging expansion of wind, solar, and other forms of clean energy supply. More recently, two states in the region, New Jersey and Illinois, have enacted policies that support existing nuclear generators that otherwise might shut down. Each policy was part of a broader package that also scaled up support for wind, solar, and energy efficiency (discussed further here and here).

The idea behind RPS policies is to replace plants that cause pollution with cleaner resources. When FERC approved the creation of the capacity markets, the basic bargain was that states could control the “generation mix” in this manner; capacity markets wouldn’t force any particular power plants on customers or states, but rather merely ensure that the target reserve margin was hit when accounting for those policies.

Owners of fossil-fuel resources push FERC to give them support

Naturally, owners of incumbent fossil fuel-fired generation threatened by these policies have sought to reverse their consequences. In 2016, Calpine, the owner of a large fleet of natural gas plants across the country, filed a complaint to FERC arguing that state policies “artificially suppressed” PJM capacity prices, urging the agency to order PJM to use a regulatory mechanism called the Minimum Offer Price Rule (MOPR) to block resources supported by such policies from selling in the capacity market.

MOPR, explained in greater detail here, was initially designed to prevent market manipulation by forcing companies that have an incentive to manipulate prices to offer bids into the market at prices that reflect the “true” costs of supplying capacity from the power plants they own. Calpine and other owners of incumbent fossil-fired resources pushed FERC to expand and misuse this mechanism by forcing MOPR upon state-supported resources, whether or not their owners have any incentive to manipulate prices. They are urging FERC to require a warped calculation of “true” capacity costs that ignores revenues earned under state policies.

If the new minimum offer price is higher than that of enough other generators to meet the region’s capacity demand, these state-supported suppliers of renewable or nuclear units will no longer be selected to provide capacity to the PJM region, forcing utilities to buy more capacity than they need. The PJM auction would ignore the presence of state-supported generation, meaning that customers will have to buy enough capacity through the auction to hit the reserve margin without those resources, even though renewable and nuclear generators supported by states are perfectly capable of keeping the lights on when the system is most stressed. And consumers would continue to pay for the presence of state-supported units through the policies that encourage them to be built and/or stay online. The end result is more profits for Calpine and similar companies at great cost to customers.

While Calpine’s complaint was pending at FERC, PJM, at the urging of its generation-owning members, filed two similar proposals at FERC (discussed here) that were essentially variations on this theme. One idea, capacity re-pricing, was developed by PJM to offer slightly more solicitude to states by allowing state-supported resources to continue to sell in the market, but at higher prices (guaranteeing more profits for all capacity suppliers). The other, an extension of the current MOPR, referred to as “MOPR-EX”, was essentially the same as Calpine’s idea but with a few exemptions, including a highly flawed RPS exemption that would allow renewable resources supported by some but not all of the state RPSs in the PJM region to continue to factor in revenues from those policies into their capacity market bids. (Both ideas are summarized in greater detail in this report).

NRDC and others in the Sustainable FERC Coalition opposed all of these bad ideas, submitting filings (links here and here) that explained how the schemes misunderstood fundamental economic principles, illegally intruded on state authority over energy policy, and would unnecessarily raise costs for customers. States and consumer advocacy groups delivered similar messages to FERC.

FERC’s order

Shockingly, FERC issued an order on June 29 that agreed with the demands of the owners of fossil fuel-fired generators. Rejecting capacity repricing and MOPR-Ex as insufficiently extreme, it ordered PJM to expand the MOPR to all suppliers earning revenue from so-called “out-of-market payments” with “few or no exceptions.”

Acknowledging that its decision would impose unnecessary costs on customers, FERC offered the rough outlines of an idea that nevertheless may ultimately provide some solace to customers and states. It proposed that utilities might be able to enter into separate arrangements with resources supported by state policies outside the PJM capacity market, with a corresponding decrease in the amount of capacity they otherwise would have to purchase in that market. Yet FERC left key details of this mechanism unresolved, proposing to sort them out in impossibly short order by soliciting comments from market players through a “paper hearing” process over the next 90 days.

FERC’s decision prompted two powerful dissents (summarized here and here), meaning that it was issued on a very slim 3-2 margin. Commissioner Glick appropriately attacked the order as an illegal affront to states and customers, detailing why the order lacked any evidentiary basis or coherent rational explanation. Commissioner LaFleur, among other things, took issue with the Commission’s impossibly short deadline to adopt “the most sweeping changes to the PJM capacity construct since the market’s inception more than a decade ago.” Commissioner Powelson, part of the slim majority, is leaving FERC later this month.

Clean energy advocates join consumer advocates and states in pushing back

A coalition of clean energy organizations (including the Sustainable FERC Project, NRDC, Earthjustice, Sierra Club, and the Environmental Defense Fund) filed a request for rehearing on July 30 urging FERC to reconsider its misguided action.

Our request, which is a necessary step before filing any action in court to overturn the order, explains how FERC’s order violates its duties under the Federal Power Act and Administrative Procedure Act (a federal statute governing agency decision-making in general). FERC’s order is flawed in many respects, the most basic of which being that it never explained why the effects of state policies on PJM’s capacity market prices are “unreasonable.” In challenging the order, we join a wide array of states and consumer advocates. The Organization of PJM States voted 13-0 to oppose the order, with only one abstention.

Fatal to FERC’s logic is the fact that state climate policies don’t prevent capacity markets from attracting the right amount of generation to meet a region’s target reserve margin (as explained in this report from the Institute for Policy Integrity, a think tank based out of NYU law school). To the contrary, PJM’s bloated reserve margin demonstrates that FERC’s reforms are not necessary to prevent blackouts. Further, Economics 101 tells us that these state climate policies make the market more efficient, not less, because they pay non-polluting generators the value they produce by avoiding “externalities” (costs of market activity that aren’t otherwise reflected in market prices). And while FERC’s logic is that state policies must be adjusted for because they support “uncompetitive” generation and displace “competitive” plants, that logic is particularly unpersuasive with respect to state renewables policies, which provide support to wind and solar resources based on competition by developers to provide them at the lowest possible cost.

Even as our rehearing request is pending, NRDC and others understand that we cannot delay in carrying out the fixes that are possible under the terms of FERC’s order. Accordingly, NRDC and Sierra Club commissioned a report from economists Robert Gramlich and James Wilson to explain how FERC’s barely conceived idea to provide an alternate market path for state-supported resources could be turned into a reality. While FERC’s best course would be to reverse its order, it can significantly reduce the problems its order causes by doing a good job of designing an alternative to the capacity market. States and customers should demand at least this much.

The views expressed in this blog are those of the author, and do not necessarily represent the views of the Sustainable FERC Project or Natural Resources Defense Council.

Written by Miles Farmer