Capacity Market FERC Litigation PJM Reliability and Resilience

Federal Judges Hear Arguments Against PJM Market Rules

February 21, 2017

By Jennifer Chen, NRDC Alum

The D.C. Circuit Court of Appeals heard oral arguments this week on the various challenges to the Federal Energy Regulatory Commission (FERC) approval of capacity market rules for PJM, the electric grid operator serving 61 million electricity customers in the Mid-Atlantic and Midwest. PJM’s new rules are controversial because they funnel billions of dollars from those electricity consumers to fossil and nuclear power plants and largely exclude competition from economical, reliable wind and solar power and demand response (paying volunteers to cut electricity use when the grid is stressed).

The oral arguments followed a round of legal briefs. Fundamentally at issue is whether FERC, in approving PJM’s rules, satisfied its mandate to ensure that the rules would result in reasonable rates to consumers and would not preference certain energy resources over others without good reason. FERC’s approval, under federal law, must be rationally based on the evidence before it, and it must explain its reasoning. A diverse group of stakeholders—including state oversight agencies, rural electric cooperatives, public power, and clean energy advocates—argued that FERC failed to do any of this.

What is PJM’s capacity market?

PJM runs a market that determines which energy resources (coal, gas, nuclear, demand response, and wind and solar power) will supply the region’s future power. The commitment to supply electricity or reduce its consumption in the future is the “capacity.” In theory, the market is supposed to competitively determine which resources the PJM region should invest in to ensure that the electricity supply is sufficient to meet future demand.

PJM’s controversial new rules

PJM’s capacity market has operated reliably since its inception in 2007, and clean energy participation has been growing in that market, helping to keep prices low and protecting the region from fossil fuel price volatility. The 2014 polar vortex tested PJM’s system—it was so cold that coal piles froze and poorly maintained gas plants could not operate. Even so, PJM had sufficient resources to preserve reliability throughout that winter and again in the winter of 2015 when polar vortex conditions returned. By then, PJM and plant operators had mostly addressed the reasons for the power plant failures through weatherization and maintenance. Nevertheless, the experience prompted PJM to adopt a sweeping overhaul of its capacity market rules. The new rules require that all capacity resources be available to perform whenever called on, 365 days a year. Perversely, these new rules will hurt the very resources that were critical to ensuring reliable grid operations during the polar vortex, such as strong winter winds and demand response.

Seasonal supply can more economically and reliably meet seasonal demand

While this always-available, all-year requirement is superficially resource neutral, it disadvantages or excludes resources that perform reliably and economically in the winter (like wind) and the summer (like solar and smarter use of air conditioning) but not necessarily all year. Requiring all resources to be available at the same level 12 months a year ignores the fact that both electricity demand and economical, emissions-free and fuel-free supply in PJM are seasonal in nature.

Source: PJM – Electricity demand in dark orange (“Summer Loads” and “Winter Loads”) is largely seasonal.

Source: PJM – Electricity demand in dark orange (“Summer Loads” and “Winter Loads”) is largely seasonal.

Both supply and demand peak in the summer—for example, it’s cheaper on the hottest summer days (when everyone is running the AC at full blast) to pay willing customers to curtail or shift electricity use instead of firing up backup power plants, which tend to be expensive, inefficient, and highly polluting in order to accommodate greater electricity demand.

Source: Wilson Economics – Enabling wind, solar, EE (energy efficiency) and DR (demand response) to compete for seasonal capacity commitments (“Summer 90/10” and “Winter 90/10”) would help avoid over-procuring traditional generation (in royal blue) in the winter or off-peak seasons.

Source: Wilson Economics – Enabling wind, solar, EE (energy efficiency) and DR (demand response) to compete for seasonal capacity commitments (“Summer 90/10” and “Winter 90/10”) would help avoid over-procuring traditional generation (in royal blue) in the winter or off-peak seasons.

Eliminating seasonal resources and only procuring annual resources could further inflate costs to consumers by the billions of dollars, as shown by our analysis and PJM’s market monitor’s analysis, both by over-procuring capacity during the off-peak seasons and by restricting competition in the capacity market to expensive fuel-burning power plants.

There is nothing magical about 365-day availability—PJM could ensure year-round reliability with seasonal resources by procuring capacity for four, six, or eight months at a time—that is, by covering the year with commitment periods that more closely track the seasons. (For example, PJM’s rules previously enabled procuring summer-only capacity, and the New York grid operator procures capacity in six-month chunks.) Changing this one arbitrary requirement (PJM could even keep the other features of its new rules) to allow for capacity procurement on a seasonal basis would more flexibly procure economical, clean, and reliable resources, such as solar, wind, and customers’ smarter use of air conditioning while avoiding costly and wasteful over-procurement in the off-peak seasons.

PJM recognized the benefits of seasonal resources and proposed to let them “aggregate” to patch together 12 months of availability. However, aggregation is unworkable in practice; the task of finding another resource in the region with complementary availability and negotiating a contract to share the risks and rewards of participating in the market is burdensome and inefficient. So far, despite PJM holding two years of auctions under its partially implemented new rules, only one company in PJM has managed to aggregate, and it did so by aggregating resources within its own fleet. Moreover, allowing seasonal resources to aggregate does not overcome the expense of procuring the same amount of capacity all year, because PJM will still be over-procuring in the off-peak seasons and stranding summer-only resources (that can’t find a winter resource to pair with) that could otherwise more economically meet the higher summer peak.

PJM’s new rules are not needed to ensure reliability

The reliability of the electric grid is a matter that everyone takes seriously. Because it is prohibitively expense to build a system that never fails, the current industry-wide reliability standard is to build the system so it experiences a “loss of load” event (such as a blackout) only once in 10 years. Of course, we could build the system to be even more reliable so that it only experiences a loss of load once in 50 years or once in 100 years, but at some point, that would cost more than it would benefit us (note that those with critical dependence on electricity, e.g., hospitals, have backup generators).

While PJM and FERC state that the new rules are needed to ensure the system maintains reliability, PJM never claimed—and FERC never found—that PJM has failed to satisfy the industry-wide once-in-10 years reliability standard at any point during the recent harsh winters, or that PJM’s new rules are needed to meet that industry-wide standard. PJM didn’t even estimate how much of an improvement in reliability the expensive new rules would produce. In contrast, we had submitted evidence indicating that the current level of reliability is far better than the once-in-10-years standard and that fully transitioning to the new rules would not necessarily produce a better level of reliability.

Even if it’s difficult to quantify the reliability benefit of PJM’s new rules to compare them to their costs, PJM or FERC could have done a cost-effectiveness analysis. The question then becomes, given a reliability target (the once-in-10-years standard), (1) is PJM meeting that standard, and if not, (2) what is the most economical way of doing so? Neither PJM nor FERC attempted this analysis.

Instead, they argue that variable renewable resources like wind power cannot be relied on because the wind does not always blow. This is a red herring. While the wind does not always blow at a given location, grid operators use forecasting to determine how much they can rely on wind or solar over a geographic region. Further, wind and solar are already discounted in the capacity market to take into account the variability in wind strength and sunshine. For example, a wind turbine capable of generating 100 megawatts of capacity is limited to 13 megawatts of capacity credit, even if it often generates more.

Variable renewable and demand-side resources are highly reliable and cost-effective—the problem is that the market rules were designed around traditional, fuel-burning resources and need to take into account the evolving resource mix. PJM’s new capacity market rules are a prime example of this problem. Already, partial implementation of the rules has cost customers billions of dollars more because FERC didn’t look into whether the benefits were worth the costs. We hope the Court will correct that mistake.