Changes to PJM’s Capacity Market Likely to Harm Consumers, States, and the Environment

Back in the spring of 2018, PJM, the entity responsible for running wholesale electricity markets for thirteen states plus the District of Columbia under the oversight of the Federal Energy Regulatory Commission (FERC), filed changes to its capacity market to address electric generators that receive support from state programs.

Got that? Anyone not immersed in the details of electricity markets might be hard-pressed to make sense of the terms in the preceding sentence.

But they are worth unpacking, because they affect what we pay for the assurance that our lights will go on when we flip the switch, and how that assurance is compatible with the need to substantially increase the clean energy sources that power the electric grid. Our ability to combat climate change is largely dependent on accelerating our transition to clean energy resources and away from fossil fuels. A cleaner grid also supports the decarbonization of transportation, another top contributor of carbon dioxide emissions, through electrification.

An increasing number of states are mandating that utilities serving in-state customers satisfy renewable portfolio standards and meet clean energy goals. States do so in exercise of their right to shape their desired power mix, consistent with the Federal Power Act.

Nevertheless, incumbent, fossil fuel providers have complained that state-preferred clean energy has an unfair market advantage in interstate power markets. They have requested that FERC, which oversees these markets, prevent clean energy resources from fully participating.The proposed market changes currently pending before FERC will impact the participation of state-preferred clean energy for the 65 million customers.

The proposed market changes currently pending before FERC will impact the participation of state-preferred clean energy for 65 million customers.

FERC’s recent activities show that it is inclined to grant these requests. The proposed market changes currently pending before FERC will impact the participation of state-preferred clean energy for the 65 million customers served by the Regional Transmission Organization (RTO) known as PJM.

If FERC accepts the changes, it will penalize states, clean energy providers, and consumers. Despite their ability to lower market prices and provide low-or-no-carbon electricity, clean energy resources will be kept out of the market. Consumers will be overcharged by billions; states’ rights will be tossed aside; inefficient fossil fuel facilities will receive a new lease on life; and the transition to a more climate-friendly, clean energy electricity sector will be delayed.

The Players

FERC is a federal agency composed of five commissioners appointed by the president subject to Senate confirmation; the president designates one of the commissioners to be the chairman. FERC requires a quorum to take action. FERC is historically nonpartisan and is required to have no more than three commissioners from any one political party. FERC is currently comprised of two Republicans – Chairman Neil Chatterjee and Commissioner Bernard McNamee – and one Democrat, Commissioner Richard Glick. The current FERC general counsel, James Danly, is expected to be confirmed as a third Republican commissioner. Under the Federal Power Act, FERC is responsible for overseeing wholesale sales of electricity and transmission of electricity in interstate commerce, including in RTOs.

PJM coordinates the movement of electricity over its grid for all or parts of thirteen states and D.C., serving over 65 million people. An independent revenue-neutral entity that takes its instructions from FERC, PJM plans the regional transmission grid and administers different wholesale electricity markets. These markets include an energy market to meet the hourly and daily needs of consumers in PJM, as well as a capacity market to ensure resources are available to meet projected future demand.

PJM operates its capacity market three years in advance, estimating future power needs and paying generators in advance for their ability to provide power later. The capacity market is designed to provide a distinct source of revenue for generators, while signaling when new generation is needed.

It is worth noting that fossil fuels have become increasingly dependent on revenues from capacity markets. In 2018, for example, almost ninety percent of coal plants were unable to cover their costs based on revenues from the energy market alone.

States exercise important authority, consistent with the Federal Power Act, over retail sales and distribution of electricity to end-users. States also decide what resources should be used to generate electricity within their borders. In the PJM footprint, a number of states have enacted laws and policies to reduce carbon emissions from the power generation sector, such as zero emissions credits that recognize the carbon-free attribute of nuclear generation. Yet, as a region, PJM sees more new natural gas generation than renewables and has thehighest percentage of new polluting generation of all the RTOs.

The Issue

In an April 2018 filing at FERC, PJM proposed changes to its capacity market rules to address a “threat” that state clean energy subsidies allegedly pose to producing revenue. PJM filed two alternative proposals to address this perceived problem – neither deferred to state preferences or attempted to address the market failure presented by externalizing the costs of climate pollution. In June 2018, a divided FERC rejected both of them, while endorsing the incumbents’ theory and directing PJM to come up with a new solution.

PJM proposed to severely curb the ability of resources that receive certain state support from participating in the capacity market.

PJM submitted its new proposal in October 2018. Clean energy advocates called it “worse than expected.” PJM proposed to severely curb the ability of resources that receive certain state support from participating in the capacity market by expanding its minimum offer price rule, or MOPR, which restricts resources from bidding into the auction at what is determined to be an unreasonably low price. Originally intended to prevent entities that both buy and sell capacity from manipulating the market to their advantage, the MOPR now stands as a barrier to the participation of a broader class of resources. PJM also proposed an Extended Resource Carve-Out that would permit subsidized resources to receive a capacity obligation without participating in the capacity market, but require these resources to pay dirtier generators that did not get capacity obligations.

PJM’s proposal carries serious risks for consumers and state clean energy goals. If clean energy resources do not clear the capacity market, consumers will pay not only for these state-preferred resources, but also for the (often dirtier) resources that win capacity obligations. This misalignment between what the market procures and what states – and consumers – want is only increased by PJM’s proposal.

One estimate of the financial impact of a piece of PJM’s current proposal is that capacity costs would nearly double in a single year. Much of this increased revenue would go to incumbent fossil-fuel generators that are likely not needed in light of state clean energy initiatives. Another estimate for a different piece of the proposal is that between $14 billion and $24.6 billion of redundant capacity will be procured over the next ten years -- about $73 annually for the average household.

Recognizing the harms of this approach, a diverse group of stakeholders, including consumer advocates, environmental groups, and load-serving entities, all supported another alternative: a resource-specific Fixed Resource Requirement. This option would balance an expanded MOPR in a fairer way than PJM’s proposal.

What Happens Next

States, generators, clean energy supporters, and consumer advocates had been anxiously waiting for a decision from FERC on PJM’s proposal. In early September, however the state of alert temporarily shifted: Commissioner Glick announced that under a revised ethics interpretation, his recusal period related to former client work extends through November 29. With only three commissioners, his recusal meant FERC lacked a quorum to act on any proceeding impacted by this recusal, including the pending PJM proposal.

But now, the quorum is newly reconstituted. So we are back to keeping watch for what is likely to be a highly complex order that puts billions of dollars on consumers and into the pockets of polluting generators, tilting the scales against cleaner resources. This head-in-the-sand approach to climate and clean energy will undermine state policies that are driving progress towards crucial work on reducing emissions.