April 10, 2018 by Miles Farmer, Clean Energy Advocate, & Bruce Ho, Senior Energy Advocate
A recent order by the Federal Energy Regulatory Commission (FERC), the federal agency that oversees the nation’s power grid, could block renewable energy from fair access to the grid in New England, potentially saddle customers with more than a billion dollars in unnecessary costs, and increase fossil fuel pollution. In a filing we submitted yesterday, NRDC and the Sustainable FERC Project, together with other clean energy advocates, formally asked FERC to reconsider its misguided action.
FERC’s order affecting renewable energy initiatives in Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont comes at exactly the wrong time. With the Trump administration running away from climate action, states have been stepping into the breach. But, adopted under the guise of “accommodating” state renewable energy priorities, the rule change known as CASPR (short for “Competitive Auctions with Sponsored Policy Resources”) would actually undermine state priorities by increasing payments to polluting power generators.
In approving CASPR, FERC failed to consider the rule’s cost to customers, which violates the agency’s core legal duty under federal law to ensure electricity rates are “just and reasonable.” In fact, the huge giveaway to fossil fuel generators could cost New England customers more than a billion dollars in higher electricity bills in the coming years, according to our back-of-the-envelope estimate.
While the CASPR story may seem complex, the root issue is simply stated: Should FERC recognize the electricity value of state clean energy investments when establishing rules that govern the grid, or should FERC coerce states to reduce those investments? At stake are billions of customer dollars and states’ ability to accelerate renewable energy progress to protect public health and prevent the worst consequences of fossil fuel-driven climate change. To better understand CASPR, see the primer below. (Vox’s David Roberts also has a good article on the implications for clean energy here.)
A Primer on FERC’s Regulation of the Power Grid
To understand CASPR and how it threatens renewable energy, it helps to understand how FERC regulates the nation’s power grid. Under the Federal Power Act, FERC and the states share authority over electricity. FERC regulates the bulk power system—the interconnected web of high-voltage transmission lines and power plants that supply electricity—while states regulate the prices local electric utilities charge to deliver electricity to homes and businesses, as well as the rules for siting and constructing power plants.
To carry out its role, FERC oversees regional grid operators that control the dispatch of power plants (when they get turned on and off) across much of the bulk power system. In New England, the FERC-regulated regional grid operator is known as ISO New England. (“ISO” is short for Independent System Operator.)
Regional grid operators like ISO New England manage their systems in part by operating markets where power plants sell electricity to utilities (which in turn sell it to homes and businesses). Among these, ISO New England operates an annual “capacity market” intended to reduce the likelihood of blackouts. In the capacity market, power plants don’t sell electricity itself, but instead sell a promise to be available three years in the future to provide electricity when demand is highest. (Three years gives developers time to build new power plants if needed.)
ISO New England’s capacity market works as follows: The ISO sets the amount of capacity utilities must purchase, based on anticipated future demand, and suppliers of electricity compete to deliver that capacity at least cost. Suppliers submit offers of the prices they are willing to accept in return for committing to be available for a one-year period that is three years in the future. ISO New England accepts offers in order from the lowest to the highest price, and the market “clears” at the price set by the last supplier needed to meet the ISO’s specified level of capacity. Offers from suppliers that are at or below this clearing price are accepted while offers at higher prices are rejected. Suppliers whose offers are not accepted do not receive revenues from the capacity market, which may lead them to retire. (Some will still choose to stay around due to revenues they receive from other ISO-NE markets.)
This is where things get a little dense. FERC has approved numerous rules governing the capacity market, including a “Minimum Offer Price Rule” (MOPR), originally created to prevent market manipulation by energy suppliers.
Specifically, the MOPR prevents a company building a new power plant from submitting an artificially low offer price in the capacity market that does not reflect that plant’s true costs. Why would a company low-ball its costs? A company that owns capacity but still needs to buy additional capacity on the market to serve its needs or those of its customers could offer its own resources at below cost to suppress the overall market clearing price. If successful, the money the company saves by paying lower prices for its purchased capacity could offset the losses on the capacity it sells. While potentially beneficial to the company, this behavior could lead other capacity resources to retire prematurely and, ultimately, raise customer costs.
The MOPR prevents low-balling offers by requiring capacity owners to offer new resources at prices that an independent market watchdog deems “competitive.”
CASPR’s Threat to State Renewable Energy Policies
The MOPR serves a legitimate purpose of preventing manipulation. CASPR, however, strays far from that purpose by undermining renewable energy. Here’s how:
Owners of older, dirtier, and less efficient fossil fuel resources, particularly oil and coal generation, are increasingly struggling to compete in New England’s capacity market as cleaner resources come online and natural gas prices remain low. These power plant owners have complained that state renewable energy policies are reducing their profits, and have been lobbying FERC and the courts to bail them out by restricting renewable energy’s participation in the capacity market. CASPR embraces the polluting generators’ misguided arguments. (Here is another example of their efforts.)
Rather than applying the MOPR to price manipulation as it was originally intended, fossil fuel generators have sought to pervert the MOPR by aiming the rule at state renewable energy policies simply because these policies can result in lower capacity prices. However, renewable energy policies are being adopted for health and environmental reasons unrelated to price manipulation.
Instead, fossil fuel generators argue that state policies incentivizing renewable energy enable renewables to offer in the capacity market at lower prices, by compensating these resources for their environmental benefits. The fossil generators are seeking to prevent the state policies from achieving their intended effect: replacing dirty fossil fuel plants with cleaner renewables. They are encouraging FERC to block renewables from accessing the capacity market, which will force customers to continue to prop up fossil plants through billions of dollars in unnecessary payments even though those plants are no longer necessary to prevent blackouts during peak demand.
In approving CASPR, FERC endorsed this effort. CASPR will expand the MOPR to force new renewable energy to offer in New England’s capacity market only at inflated prices because it forbids renewable energy project owners from submitting lower offers into the capacity market that account for incentives they receive under state policies. State policy support makes it economical for renewable projects to offer at lower prices, but CASPR requires these projects to pretend that state policies don’t exist. This is fiction: state policies incentivizing renewable energy do exist and are financed by customers.
By forcing renewable energy projects to offer at higher prices, CASPR makes it unlikely these resources will be selected in the capacity market—and more likely that non-renewable resources will be.
CASPR includes a complicated mechanism that could allow some new renewable energy to replace existing fossil fuel generation in the market. However, renewable energy projects would be required to pay fossil fuel generators to give up their positions in the market. Fossil fuel generators would be free to reject such offers, or require exorbitant payments. Under CASPR, fossil fuel generators would receive windfall payments while controlling the rate of renewable energy’s entry into the market, not the state renewable energy policies enacted for this purpose.
If this scheme sounds complicated, unnecessary, and misguided, that’s because it is.
A Bad Deal for Customers
Customers will be hurt by CASPR in multiple ways.
By hampering renewable energy from participating in New England’s capacity market, CASPR will result in more dirty generation procured in that market. But this won’t just be a swap of dirty energy for clean. New renewable energy projects will be built regardless of CASPR because, as FERC has recognized, New England state laws mandate their construction. Instead, CASPR will force customers to pay twice—for both the renewable energy they want and for unnecessary and duplicative fossil fuel resources procured by ISO New England in the capacity market.
The rules will also make renewable energy projects more expensive. Because their developers won’t be able to count on revenues from the capacity market, they will require more money upfront, raising the costs of state renewable energy policies to customers.
This adds up to a very bad deal. Yet FERC didn’t even consider these costs to customers. Instead, FERC cited the need to ensure “investor confidence”—the likelihood that fossil fuel power plant owners, not customers, would profit from the market.
FERC has an important statutory role in ensuring fair electricity markets and competition. This role does not include guaranteeing that fossil fuel power plants are profitable, nor does it include usurping state authority by adopting rules that reverse state renewable energy priorities.
FERC should rethink its misguided CASPR rule and instead ensure capacity and other power markets support and provide the clean resources states and customer want.
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.