After intense protests from state leaders, consumer advocates, and environmental groups, the Federal Energy Regulatory Commission (FERC) and power grid operator PJM have pulled back from a 2019 plan that would have undercut state efforts to boost renewable energy resources. While owners of fossil fuel plants are trying to block this much-needed change, NRDC joined with Sierra Club, Union of Concerned Scientists, and Earthjustice to intervene in court and support this course correction for capacity markets.
The Minimum Offer Price Rule, or MOPR, is a capacity market rule that’s been around since 2006. Capacity markets aim to ensure reliable power by contracting with power plants to meet predicted demand three years in advance. The MOPR aims to prevent market manipulation by stopping utilities that both buy and sell capacity from using bids to artificially reduce the price for their own benefit. But in 2019, FERC dramatically expanded the MOPR in PJM’s capacity market to serve a new purpose: protecting legacy coal and gas power plants by essentially nullifying state support of renewable energy resources. Any solar or wind generator that benefitted from state climate legislation was forced to bid into the capacity market at an artificially high price, effectively pricing it out of the market, excluding it from those revenues, and forcing customers to buy replacement capacity they didn’t need. The result would have been catastrophic: higher electricity prices for customers, and inappropriate interference into state efforts to achieve ambitious clean energy goals.
Faced with widespread opposition and the threat of major utilities leaving PJM’s capacity market altogether, PJM corrected course in 2021 by replacing the “Expanded” MOPR with a “Focused” MOPR that will appropriately and fairly balance market and state interests. Congress intentionally split authority for utility regulation between FERC and the states in the Federal Power Act. FERC regulates interstate wholesale electricity markets like PJM’s capacity market, but the states maintain control over what types of energy generation resources are built or operated within their borders—whether wind or solar, gas or coal.
As the U.S. Supreme Court has recently recognized, state and federal policies will always have impacts in markets regulated by the other. There are a multitude of federal, state, and local policies that shape the demand and supply fundamentals of the wholesale market, and as FERC explained, trying to isolate the federally regulated wholesale market from the effects of these policies “inevitably leads to … arbitrary and burdensome line-drawing.” In fact, attempting to get in the way of certain state policies actually distorts the economics of the capacity market. State policies can address externalities—like carbon pollution—that are not accounted for or compensated in the electricity markets. That’s a good thing.
The Expanded MOPR got in the way of these types of policies. If the capacity market ignores some of a resource’s actual costs and revenues—such as the cost of pollution—the market may not actually reflect the lowest-cost or most efficient means of ensuring resource adequacy. In the one capacity auction where PJM applied the Expanded MOPR, hundreds of megawatts of capacity were effectively excluded, forced to bid in at a price well above the generators’ actual costs. Customers then were forced to pay higher capacity prices for resources that were not needed to meet the system’s resource adequacy need. Had PJM continued to apply the Expanded MOPR, it was predicted to cost consumers nearly $2 billion every year in payments to unneeded fossil fuel power plants. And renewable energy resources essentially were kept out of the capacity market.
The Focused MOPR, on the other hand, returns to the basic premise of the rule—preventing market manipulation. The Focused MOPR will be better for the capacity market. Going forward, generators will be allowed to make capacity offers that reflect their actual costs—including any offsets they may receive as a result of state programs intended to reduce greenhouse gas emissions and other harmful air pollution. But utilities that attempt to underbid their actual costs to benefit from lower capacity prices—i.e. engage in market manipulation—will still be subject to the MOPR.
PJM isn’t the only regional transmission organization course-correcting after an ill-advised foray into price-setting protectionism on behalf of coal and gas. Earlier this year the grid operator in New England (ISO-NE) proposed, and FERC approved, a similar change rolling back price floors intended to counteract state climate policies.
The course correction hasn’t come without a fight. Fossil fuel generators challenged the order allowing PJM’s Focused MOPR to go into effect before the U.S. Court of Appeals for the Third Circuit. FERC defended that order (and the Focused MOPR) in a brief filed earlier this summer. And last week NRDC, Sierra Club, Union of Concerned Scientist, and Earthjustice submitted a brief supporting FERC. Now we just have to wait and see what the Court decides.
Regardless of the court outcome, the future appears clear—capacity markets shouldn’t be designed to nullify state policies supporting renewable energy.
Image source: Tom Brewster Photography