By Jennifer Chen, NRDC Alum
Some of the proposed wholesale capacity market rule changes that are projected to increase costs for 61 million Mid-Atlantic and Midwest energy customers – and tend to favor fossil fuel generation over carbon-free resources – are being revised, but not all of them.
The Sustainable FERC Project coalition opposed these proposed rules and advocated for specific changes in the event they take effect. The federal agency regulating these markets is siding with us on some issues, and where it disagrees with us, we will continue to find ways forward.
A brief recap
PJM, the grid operator for all or parts of 13 Mid-Atlantic and Midwestern states and the District of Columbia, is seeking to implement big changes to its capacity market, which is where energy resources compete with each other to determine who can provide the grid with energy, not now but three years in the future, at the lowest prices. (PJM has a separate “energy market” where energy to be delivered in real time is bought and sold.)
PJM’s capacity market brings in billions of dollars in revenue, which may help fund the build-out of natural gas plants, be invested in carbon-free resources, or provide a lifeline to keep old, inefficient coal plants online. PJM can impose restrictions on its markets, which can limit the types and amount of the resources that can sell in its markets. These restrictions help ensure the “quality” of the resources in the market, but overly restricting access to the market tends to raise market prices (and costs to consumers) by reducing competition between resources.
PJM’s proposed rules would restrict the participation of carbon-free resources in its capacity market because they would essentially require all resources be available at all times. This makes it difficult for variable renewable resources (such as wind and solar power) to participate because the wind isn’t always blowing and the sun isn’t always shining.
The rules would also inhibit participation from resources based on customers’ voluntary reductions in energy consumption, such as energy efficiency (the smarter use of energy) and demand response (paying customers to cut power use during peak demand periods, such as on hot summer days when air conditioners are running full blast). As a result, the rules would effectively restrict capacity market competition to more costly resources that continuously burn fossil fuels, which would increase costs to consumers, create barriers to higher-tech clean grid solutions, and increase pollution.
Good and not-so-good FERC decisions
Unfortunately, the agency regulating PJM’s capacity market, the Federal Energy Regulatory Commission (FERC), approved PJM’s rules in June with some relatively small tweaks. We had opposed PJM’s proposed changes because they will unnecessarily increase costs for consumers and reduce the ability for clean energy resources to participate in PJM’s capacity markets.
Despite this setback, we recently helped obtain some good results for clean energy and consumers in the near term. FERC agreed with our coalition and allies that excluding clean energy resources that otherwise qualify to participate in PJM’s near term capacity auctions is illegal discrimination and will unreasonably increase costs. These auctions are meant to gradually phase in PJM’s proposed requirements, and will help determine what resources will serve the grid in the next couple of years. PJM’s proposal would have allowed only generation resources, such as power plants – and not energy efficiency, demand response, or energy storage resources – to participate in these auctions. FERC’s decision means that we will retain more of certain clean energy resources in the near term.
Further, FERC’s approval of PJM’s proposed changes is not the end for comparable treatment for clean energy in PJM’s capacity market, because we can ask FERC to reconsider its decision.
FERC to reconsider the case for clean energy
For example, we pointed out that PJM’s own cost-benefit analysis showed that an earlier version of its proposal would incur costs exceeding the proposal’s quantified benefits. PJM did not update its cost-benefit study for its current proposal, but we argued the current proposal would still cost consumers more than they’d benefit. Importantly, PJM did not dispute the relevance of its previous cost-benefit study to its current proposal in responding to our arguments. PJM countered (and FERC accepted the argument) that PJM does not need to perform a cost-benefit analysis to justify its market rules.
This may be true generally at FERC, but when the existing evidence indicates that a proposal will incur more costs to consumers than it will benefit them, the reasonable conclusion is that the proposal will not result in reasonable rates for consumers, and FERC’s determination to the contrary is lacking in supporting evidence. FERC has indicated that it is reconsidering its approval (we don’t know when it will issue its decision), but we remain hopeful that FERC will rule in favor of consumer savings and clean energy.