Markets PJM

PJM’S Capacity Market Reforms: Almost, But Not Quite

October 31, 2023

When Winter Storm Elliott slammed the United States with freezing temperatures just before Christmas in 2022, nearly 40 percent of gas-fired power plants in the largest U.S. power market buckled—thanks to shoddy maintenance and the failure to buy fuel—alongside a concerning number of coal plants. These failures pushed the eastern U.S. grid to the brink of rolling blackouts. Now PJM is among those asking just how much those gas generators and other power assets are really worth, when energy is most needed.

PJM is updating its methods for valuing a given generator’s contribution to “resource adequacy,” an industry term that encompasses the ability of the grid to provide reliable power at all times. The changes will transform PJM’s capacity market, where power assets are paid to be available when called upon and customers are paid to conserve energy during emergencies. These reforms were put on a fast track after Elliott, which again exposed how vulnerable gas plants are to extreme cold. (Gas disruptions caused by freezing temperatures were also the main cause of the disastrous power outages in Texas during unusually cold blasts in 2011 and 2021, and a significant contributor during the 2014 polar vortex.)

PJM’s capacity market changes are a long overdue effort to finally confront the danger of unreliable gas and coal plants. Accurately valuing how these assets contribute to reliability, a practice known as capacity accreditation, is essential to protecting customers from outages and price spikes like the ones that occurred during conditions like Elliott. The new changes focus on how to model and prepare for potential risks to the bulk power system. Risk modeling dictates how much power grid managers must hold in reserve and how to value what different sources of power can contribute to reliability. 

Traditional models have overvalued the contribution that fossil fuel generators offer to reliability and weren’t well suited to newer resources like renewables and storage. As renewables account for an ever-increasing share of the U.S. power mix, grid managers are re-evaluating methods for capacity accreditation with the goal of improving system reliability and controlling prices. PJM’s existing model, for example, does not reflect the fact that many power plants can fail at the same time during severe weather.

Overvaluing gas-fired generators in the capacity market undermines reliability and slows the transition to clean energy resources. We support PJM’s proposal to move to accreditation based on effective load-carrying capability (ELCC), a measure of a resource’s contribution to grid reliability during periods when there’s a high risk of blackouts. Accurate accreditation will allow grid managers to replace fossil plants with clean energy resources as quickly as possible while still maintaining reliability. It will also help retain and attract just enough power plants needed for reliability, but no more. 

NRDC and Sierra Club also support PJM’s decision to continue to acknowledge the value of energy imports from other power regions. In emergencies, utilities support their neighbors: For example, during Elliott, PJM imported power from the Midwest and sent that power to the Southeast. That’s a change from earlier proposals, which inexplicably assumed PJM would not import a single megawatt-hour (MWh) during any critical hour at any point in the future. That would have been a step in the wrong direction, as reliability in the future will benefit from regions supporting each other, using a grid that’s “bigger than the weather” and not broken up into isolated parts. PJM submitted its capacity market proposal to the Federal Energy Regulatory Commission (FERC) on October 13. Stakeholders have until November 3, 2023 to comment.

In a step backward, though, PJM proposed to lower fines on power companies that are paid to be available when called upon and yet fail to deliver. When power plants fail, it’s often because their owners cut corners on maintenance. When power plant owners do this, they’re betting that the savings from cost cutting will be more than the penalties they might have to pay. Reducing penalties is a direct message to power plant owners that they should spend less on preventative maintenance and preparation for emergencies.

For the sake of grid reliability, FERC and PJM should hold suppliers to their commitments. As multiple regions face challenging weather extremes and tighter reserve margins, dependable supplies will be essential. Making it easier for power plants to renege on their commitments and fail when they’re needed most will only undermine reliability. 

PJM’s proposal also harms states that invest in clean energy. When there’s more renewable energy on the system, it needs fewer traditional resources. But PJM proposes to take those savings and distribute them equally to all the states in a region. That’s simply unfair to the states that paid the bill for adding clean power. States without clean energy policy shouldn’t be allowed a free ride on the savings created by states that are investing in the future—but that’s exactly what PJM proposes to do.

The proposal also simply gets critical details wrong. In some situations, PJM will penalize resources when they weren’t expected to perform. For example, solar is paid on the basis of how much energy is needed during the daytime, but it’s still penalized if it doesn’t perform at night. It’s correct to reduce payments to solar because it’s a daytime-only resource, but if states are only paying solar to perform during the day, it’s senseless and unfair to also penalize them at night.

Worse yet, PJM proposes to not always require resources to deliver the entire amount of energy being counted on. ELCC is a sort of average, combining the times when resources produce well with times they do poorly. But PJM only requires resources to deliver this average amount of energy, even at times when reliability depends on them doing well. For example, one type of gas plant is valued at about 77 percent of its capacity, which accounts for it running at 100 percent most of the time and failing completely sometimes. But PJM would only require plants that are running to deliver that 77 percent of their capacity, even though it has based reliability on the plants that are running and delivering 100 percent. This creates a system where blackouts can happen even while every single generator meets all of their obligations. 

The filing proposes unfair treatment in a variety of ways. Some power plants can get bonus payments for doing what they’d already promised to do, while others that go beyond their obligations get no bonus. Demand response resources don’t get bonus payments in circumstances when a traditional power plant would. Power plant owners can raise their prices if they’re worried about penalties, but they aren’t forced to lower their prices because they might get bonuses. The list goes on.

Altogether, PJM’s rules provide some major steps forward but some steps backward. The flaws are too significant for FERC to approve the filing as is.

Finally, other reforms needed to PJM’s capacity market are simply not addressed:

  • PJM should design a seasonal capacity market. PJM has recommended maintaining an annual market, despite a compelling case for a more granular, seasonal design. NRDC and others believe seasonal markets can improve reliability and lower costs. PJM heard overwhelming feedback about the desire for more time to refine such proposals.
  • The capacity market needs to work for renewables and storage. PJM’s proposal correctly discounts renewables and storage. Everybody knows that solar doesn’t work at night and batteries eventually run down. Accordingly, PJM values solar based on how much a daytime-only resource contributes, on how often storage is needed to bridge a short-term gap, and so on. But PJM applies the same obligations and penalties to solar generators as to any other generator. So even though, for example, solar is only getting paid to provide power during the day, it gets penalized for not providing power at night. A battery that’s getting paid for four hours of power gets a penalty in the fifth hour. Right now, PJM’s workaround is simply to let renewables and storage not participate in the capacity market. As they become a bigger part of the reliability picture, that will become untenable. These rules are irrational, unfair, and anticompetitive and must be fixed.
  • Fuel supply matters. PJM can also improve on its proposal by including a more detailed consideration of fuel supply. A gas-fired unit with firm fuel commitments, for example, gets its capacity payment reduced because of the unreliability of units with interruptible fuel supply. Gas resources that had invested in reliable fuel supplies did much better during Elliott than the ones that hadn’t. Putting them all in the same bucket just lets the bad actors free ride on investments made by responsible plant owners.

There is more work to do to protect reliability, but PJM’s progress on capacity market reform sends a clear signal that it is learning, adapting, and continuing to make sure that power markets and reliability go hand in hand. While we fully support the direction of PJM’s work, its proposal just isn’t ready for prime time yet. FERC should send it back to PJM with clear directions on how to improve it into a just and reasonable solution to our changing energy grid.

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