PJM’s New Rules Skew Against Clean Energy; Silver Lining in a Lower Forecast

May 25th, 2016 by Jennifer Chen, Attorney, The Sustainable FERC Project

At a time when countries around the world have committed to cutting climate-warming pollution, our nation’s largest electric grid operator is increasing reliance on fossil-fueled power to meet future electricity demand.

PJM, the electric grid operator serving 13 Mid-Atlantic and Midwestern states and the District of Columbia, today released its latest capacity auction results showing that its new rules (which it began phasing in last year) again favor traditional power plants over clean energy. Offsetting potentially sky-high prices (as seen in the last auction) in most places was a lower electricity demand forecast, which PJM implemented beginning with this year’s auction.

PJM’s capacity auction procures power to meet future demand in its territory. The auction is conducted three years before the electricity is actually delivered so that resources can obtain revenue to make necessary investments to meet the future commitment. Energy resources sell commitments (or “capacity”) to supply power or reduce customer consumption in the future by offering competing bids into the auction. These resources include coal, gas, nuclear, wind, and solar power, as well as services that pay customers to reduce consumption when the grid is stressed. The resources with the lowest bid prices clear the auction first, and PJM continues to procure additional resources until its projected future demand is met. More resources competing in the market tend to reduce prices, and paying to procure this power are the 61 million customers in PJM’s territory.

This year’s auction was an improvement from the last one in terms of cost to consumers (in most areas except the zone around Chicago), but still indicates that wind, solar, and “demand response” resources would mostly be eliminated from the capacity market if PJM continues with its planned implementation of its rules. (Demand response is the smarter use of energy through enabling customers to reduce energy consumption when the cost of producing energy is high.)

PJM Graphic

                                                                                      Source: PJM

Critically contributing to lowering the prices for consumers this time (from what they could have been) is PJM’s new electricity demand forecast which took effect this year. The forecast is lower this year largely because PJM improved how it’s accounting for the fact that consumers are buying more energy efficient equipment and installing solar panels. This may sound like a wonky detail, but accounting for reductions in demand from efficiency and rooftop solar in the forecast helps consumers save billions of dollars, not just because they don’t need to buy as much capacity in the auction, but also because fewer of the more expensive power plants (which also tend to be dirtier) clear the auction.

While clean energy resources were still able to participate in this auction, most of them cleared as a capacity product that PJM is phasing out once it fully implements its new rules beginning with the 2016 auctions. Recall that PJM had proposed the new capacity market rules in response to the 2014 Polar Vortex because many fossil power plants had failed to deliver in the extreme cold. The new rules require that all resources perform whenever needed – anytime of the year – and imposes penalties for nonperformance. The rule changes are a barrier to resources that perform reliably and cheaply in the winter (like wind) and the summer (like solar and smarter use of air conditioning) but not necessarily all year round. And given PJM’s rationale for the new rules, it’s worth emphasizing that wind power and demand response played a critical role in keeping the lights on during the 2014 Polar Vortex.

Penalizing resources that don’t live up to their promises to actually deliver electricity makes sense. But there is no reason why every resource in the capacity market must be available 24/7, 365 days a year in order to participate as capacity. This inflexible approach precludes resources that are otherwise highly reliable for parts of the year – there is nothing magical about 365 days – PJM could just as well procure resources that commit to half that time period (e.g., divide up the year into two six-month periods). Commitment periods that more closely track the seasons would more flexibly enable solar, wind, and customers’ smarter use of air conditioning to participate in the capacity market.

Importantly, PJM has initiated a stakeholder task force investigating how resources with seasonal differences, like wind, solar, and demand response, can continue to participate in the capacity market once the new rules are fully implemented beginning with the 2017 auctions. This effort is critical because without some changes to these rules, PJM’s capacity market will have a difficult time incorporating federal and state public policies encouraging or requiring clean energy development.

Written by Jennifer Chen