Customer Bills and Clean Energy at Stake in PJM Market

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October 3, 2018 by Miles Farmer, Clean Energy Attorney

NRDC and the Sustainable FERC Project, together with a coalition of clean energy and consumer advocates, are pressing the nation’s grid regulator, the Federal Energy Regulatory Commission (FERC), to protect consumers from billions in extra charges, and respect states’ rights to advance clean energy. The groups submitted several different filings (linked here, here, and here), which were due at FERC yesterday (Oct. 2). At issue is FERC’s implementation of a June 29 order that calls for the development of new rules for the capacity market run by the PJM Interconnection, the nation’s largest grid operator, which provides about 1/5 of the nation’s power supply and ultimately serves roughly 65 million homes and businesses.

While FERC’s order dictated that some market changes are necessary (as discussed further here), it leaves open a range of potential outcomes with very different consequences for customers, states, and clean energy. One path—endorsed by NRDC, the Sustainable FERC Project and others—would establish a new market for state-backed power suppliers, which could efficiently serve customers across the region and protect the ability of the 13 Midwest and mid-Atlantic states and the District of Columbia to influence the mix of resources supplying power (and advance cleaner energy if they so choose). But other stakeholders, including the PJM grid operator itself, are proposing ideas that could over-charge customers by billions of dollars, propping up fossil-fuel fired power plants that aren’t necessary in light of state clean energy policies such as the major renewable energy initiatives passed by New Jersey and Illinois (discussed here and here). (Two federal courts recently made clear that states have broad authority over a wide range of programs to influence the power supply mix.)

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As discussed in greater detail by former Illinois Commerce commissioner Ann McCabe and me in this Utility Dive opinion piece, FERC must provide a workable path for state-backed resources to sell their capacity (which is the ability to supply power during times like hot summer days when the grid needs it the most). FERC’s June order called for the expansion of a market rule known as “MOPR” (discussed at length by Vox journalist David Roberts here), which could end up blocking wind, solar, nuclear, energy storage, and other types of state-supported power suppliers from selling their capacity in PJM’s organized capacity market (which is known as “RPM”). The PJM rules require utilities to buy a certain amount of capacity every year. If those power suppliers can’t sell their capacity in RPM and FERC does not provide an alternative means to credit that capacity, utilities in the region will be needlessly forced to buy capacity from other resources (mostly fossil-fuel fired power plants) rather than the ones their energy policies prefer. The extra capacity purchases would be unnecessary because despite being unable to sell their capacity, the wind, solar, and nuclear resources supported by states would continue to be constructed or operate, as applicable, contributing to the reliable power supply in the region. In other words, the extra fossil resources purchased would be redundant to that capacity; so as FERC describes it, customers would “pay twice for capacity,” oversupplying the market with needless highly polluting power plants.

Our market expert, Michael Goggin of Grid Strategies LLC, estimated the costs to consumers of purchases that are redundant to resources supported by existing state climate policies at roughly $25 billion. And FERC’s order leaves open the possibility of applying MOPR to an even greater range of resources, further increasing the potential costs and heightening the imperative of preventing the redundant capacity purchases.

Fortunately, FERC’s order tentatively commits to establishing a new way for state-backed resources to receive credit for their capacity. It suggests expanding an existing market rule, known as the Fixed Resource Requirement (FRR). Under FRR, utilities can opt out of RPM if they choose to supply 100% of their capacity on their own. FERC has suggested that a new “Resource Specific” FRR be offered (which we abbreviate as “FRR-RS”), which would allow utilities to supply capacity from state-backed resources outside of RPM, even if they do so for less than 100% of their capacity.

While our first preference would be for FERC to refrain from blocking state-backed resources from selling their capacity in RPM in the first place (we’ve filed for reconsideration of the order), failing that, FRR-RS is the best option. Our comments filed on Oct 2 provide a detailed proposal for how to implement FRR-RS. Our comments set forth several critical ingredients, including:

  1. FRR-RS must be designed to flexibly accommodate a range of different state policies, allowing states to dictate how capacity they support is sold. PJM’s existing FRR option, which has cumbersome and inflexible rules, demonstrates that utilities will not use a market pathway if it is too rigid. (Very few utilities use FRR);
  2. FRR-RS rules must be clear so that state legislation and regulations can properly account for them; and
  3. Adequate time must be given for the market to transition to the new framework. MOPR should be delayed for a year where states certify that they are working to establish rules that allow for FRR-RS to work for their resources.

Most importantly, FERC must follow through on its FRR-RS proposal over the objections of fossil fuel-fired power plant owners (such as those filed here and here), and should refrain from imposing complex rules that unnecessarily inflate market costs. Shockingly, PJM has proposed to require payments to be made to fossil-fuel fired capacity that is pushed out of the market by state-supported resources, without even requiring that capacity to provide any services to customers in the region.

Beyond recommending a design framework for FRR-RS, NRDC, Sierra Club, and the Sustainable FERC Project also provided comments regarding FERC’s application of the MOPR. Those comments explain why the MOPR should not be applied to competitive programs to advance renewable resources like wind and solar. They also emphasize that it would be arbitrary for FERC to apply MOPR to resources “subsidized” by state climate programs (an odd choice of words given that these programs provide compensation for emission avoidance benefits not accounted for by the market), and yet not apply to fossil fuel resources that receive true subsidies through state regulatory processes. Many fossil plants are subsidized in a non-transparent manner when state regulators require homes and businesses to pay to keep them running even when they do not earn adequate revenues in PJM’s markets to continue to operate (see this Sierra Club report for more explanation of that practice, which occurs in other regions as well).

FERC should heed the calls from clean energy advocates, consumer advocates, and states. As Illinois Commerce Commission Chairman Brien Sheahan recently argued in Utility Dive, if the PJM market stops working for states and customers, they will search elsewhere to satisfy their power needs. Regional grid operators should seek to serve the desires of states and customers, who overwhelmingly want cleaner power to replace fossil fuel-fired power plants.

Written by Miles Farmer