Capacity Market Markets PJM Planning Renewable Energy RTO Governance

Transforming PJM is the key to a clean energy grid

July 14, 2020

Voters and consumers from the Mid-Atlantic to the Great Lakes are demanding clean energy. State governments have answered with policies and goals calling for 50 percent and ultimately 100 percent clean electricity. Their pathway to success runs squarely through a little-known entity called PJM Interconnection. PJM is the regional transmission organization (RTO) that runs the electricity grid and markets serving 65 million people across a 13-state region stretching from North Carolina to New Jersey to Illinois. PJM’s rules largely control what power plants get built and how much they get paid. 

States in the PJM region are taking bold action on climate change by supporting the transition to solar, wind, energy storage, demand response, and other clean energy technologies. PJM holds the keys to facilitating this evolution, or stymying it.   

Over the last twenty years, PJM has advanced our energy system, leading the innovation needed to move from monopoly utilities to competitive markets. Over the last ten years, PJM has kept the grid reliable as dozens of dirty old coal plants shut down. Now PJM faces a new challenge: will it be able to evolve to meet the needs of a transforming power grid? To do this, PJM needs to transform in three key areas: 

  • Build a new approach to electric reliability that is not anchored in the revenue needs and capabilities of traditional power plants. 
  • Assert leadership over transmission planning so ratepayers can have confidence their money is being invested wisely. 
  • Reform its governance to ensure PJM supports the public interest, not the interest of its industry “members”. 

Over the last decade, industry incumbents have been able to distort some of PJM’s markets and procedures into multi-billion dollar subsidies for traditional power plants and transmission owners. Last year, the tensions between PJM’s rules and state energy policy reached a breaking point. Many speculated states forced major management changes at PJM. PJM’s new leadership enters with a clear mandate for change, but faces the difficult task of adapting PJM to support a low-carbon energy future. Without dramatic change, PJM risks unravelling as states and consumers move beyond the backward-looking vision it offers today. 

Fossil fuels in PJM have pushed aside renewables 

Compared to other RTOs around the country, the PJM region builds far more fossil-fuel powered plants and lags in renewable development.  

As shown in the chart above and detailed in this Utility Dive column, from 2012 through 2022, every other RTO will have added two to five times more renewable generation than fossil-fuel powered. At PJM it’s the reverse: renewables are outpaced three to one by fossil (mostly gas) additions.  For the 5 (and counting!) states in PJM with ambitious clean energy commitments, this is a serious concern.  

This is not, as some would claim, simply a result of the Pennsylvania gas boom. To be sure, many of the new gas plants are replacing old coal plants that just can’t compete anymore.  But other regions of the country have also seen historically low natural gas prices and record breaking production, yet none have built a glut of gas-fired generation like PJM. Nor is it due to increased demand for power: electricity use has decreased in the PJM region over the last 10 years. Market forces cannot explain why PJM is increasing its generation fleet even as demand declines. 

Certainly, some of PJM’s lag on renewables may be by accident of geography. PJM does not have the wind-swept plains or sunny expanses of other RTOs. But successfully deploying renewables is far more than just finding a sunny or windy spot and plunking down a power plant. Like all power plants, renewables need transmission lines to deliver their power, and revenue to justify their investment. Both of these go through PJM. Over the last decade, PJM’s rules and practices have been distorted into subsidies for traditional generation and barriers to clean energy.  

In a way, none of this is surprising: PJM is a membership organization, and its most powerful members are generation and transmission owners. For an organization that sets electricity policy over a large swath of the United States, PJM is subject to surprisingly little oversight. PJM’s rules are approved by the Federal Energy Regulatory Commission (FERC), which only judges if the rules are “unjust, unreasonable, or unduly discriminatory”. In particular, FERC cannot reject PJM rules simply for being bad policy or because a better alternative is available. This leaves PJM in a place where its rules must, for the most part, be approved by power plant owners, and are only subject to limited public review. 

PJM’s capacity market must be replaced 

The industry-centered outcome of this process is most obvious in PJM’s capacity market. Originally intended to ensure reliability, this market has become the driver of PJM’s overinvestment in traditional generation while restricting cost-effective clean energy. This is a market where owners of generation sources are paid for promising to meet future energy needs a few years down the road — a way to provide for extra cushion of power generation that’s plenty for any possible contingency.   

The shortcomings in this market start with its basic approach to reliability. PJM makes sure there is enough power through what are essentially firm contracts with individual power plants. This may have made sense twenty years ago, but is a very poor match for a high renewables future, where reliability comes from portfolios of complementary resources.  

As utilities across the country and across the world are demonstrating every day, reliable low-carbon electricity comes from combinations of solar, wind, storage and demand-side measures. PJM’s rules are stacked against those resources in many ways: the only product it buys is 24×7 energy, the only arrangement it offers is for firm power with major penalties for non-delivery, and so on. None of these are compatible with the resource mix of a low-carbon future

In the last year, these barriers to clean energy have become explicit: in 2019 FERC issued a rule that requires PJM to disadvantage any resource supported by state policy. This rule, called the MOPR, was championed by gas-fired power plant developers. It will force many renewable energy projects supported by states out of PJM’s capacity market. This makes grid planners pretend those renewable resources don’t exist, and protects fossil fuel resources from being out-competed by renewables. Adding insult to injury, consumers are then required to pay for unnecessary fossil-fuel powered power plants to stand-in for the ignored renewables. 

Beyond creating barriers to low-carbon energy, PJM’s markets buy far too much traditional power at unnecessarily high prices. This unnecessary excess power procurement benefits the generation owners who influence PJM rules. A Wilson Energy Economics analysis commissioned by NRDC and Sierra Club shows that PJM has been charging customers as much as $4.4 billion a year for extra capacity above and beyond what is actually needed for reliability, even including reserves to cover for unexpected or unlikely events.  

How many unnecessary power plants? For 2020/2021, the Wilson analysis shows PJM bought 18,000 megawatts of excess reserve capacity, akin to paying for 18 large power plants that aren’t needed. As it turns out, an analysis by Grid Strategies finds almost 18,000 megawatts of coal generation in PJM that is uneconomic but for capacity market payments.  

This is why PJM has seen so many unneeded new fossil-fuel plants: at least one-third of the new power plants in PJM have been built in response to false demand created by a broken market. Fixing this is Sustainable FERC’s top priority in the region. We are not alone. Ratepayer advocatespublic powerfree-market think tanks, and industry all agree that PJM’s capacity market is in need of serious reform. 

PJM must assert control over transmission planning 

PJM also oversees, but does not own, 84,000 miles of high-voltage transmission lines in its territory. Part of PJM’s oversight responsibility is to plan for future transmission needs and to run competitive processes for building and upgrading transmission lines. PJM gained these responsibilities about ten years ago when FERC issued its Order 1000, which attempted to reform transmission planning and competition. 

When a transmission owner builds a new project, it enjoys a guaranteed return on its investment for many years. This is a powerful incentive for unnecessary investment and overspending—known as ‘gold plating’ in the industry. Preventing this sort of abuse is one of PJM’s responsibilities, but sadly, the last ten years have seen a vast expansion of transmission owners taking advantage of the system. 

The rules on transmission investment have several loopholes, originally intended to deal with somewhat rare situations. These loopholes let some types of projects avoid PJM’s planning procedures and undergo only the most limited review, even to determine whether they are necessary at all. In the last ten years, these so-called “supplemental,” “immediate need,” and “end of life replacement” projects have exploded in PJM to the tune of many billions of dollars per year, to the point where they are now the vast majority of transmission spending in the region.  

This problem has gotten so bad that electricity consumers across the PJM region have openly declared their worries of insufficient oversight. The level of distrust created by these uncontrolled billions of dollars cannot be overstated. As a result, it has become nearly impossible to gain support for the transmission investment needed to support a future clean energy mix. 

The U.S. has an acute need for well-planned transmission investment. More low-carbon energy will change the geography of the transmission system, and create a need for long-haul transmission that can help deliver and balance renewable resources across the country. However, just as we need coordinated national investment, consumers are getting the bill for billions spent with inadequate planning, oversight or transparency. At a time when we need to invest in a 21st century power grid that can deliver clean energy across the nation, we are confronted with transmission oversight that has failed us. 

We face similar problems across the country. Much of this mess comes from flaws in FERC rules and the law. Even if blameless, PJM must commit to being part of the solution. It must act by exercising greater oversight over all transmission projects, reform its governance to reduce the outsized power held by transmission owners, overcome historic reluctance to work with its neighbors, and support needed transmission planning reforms at FERC and Congress. 

#TransformPJM 

Organizations like PJM are critical to our clean energy future. The competitive markets and large-scale planning they promise can help us decarbonize efficiently and affordably. PJM’s leadership must rise to the challenge of supporting our nation’s transforming power system. They can do this by ensuring the power of markets serves, rather than blocks, the exploding movement for clean power. Decarbonization has joined reliability and affordability as one of the guideposts of our electric system.  Can PJM transform itself in time to stay relevant in this world? 

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