Guidance for States on Potential Steps to Opt Out of PJM’s Capacity Market

A transmission tower in front of a blue sky

The State Impact Cen­ter has part­nered with Synapse Ener­gy Eco­nom­ics, Inc. to release a guide, The Fixed Resource Require­ment Alter­na­tive to PJM’s Capac­i­ty Mar­ket: A Guide for State Deci­sion-Mak­ing, to help state attor­neys gen­er­al and oth­er stake­hold­ers in and out­side of PJM Inter­con­nec­tion Inc. (PJM) eval­u­ate whether and, if so, how, to poten­tial­ly opt-out of PJM’s capac­i­ty mar­ket in response to a recent deci­sion by the Fed­er­al Ener­gy Reg­u­la­to­ry Com­mis­sion (FERC) which penal­izes state-sup­port­ed clean ener­gy resources. To learn more about the work of attor­neys gen­er­al in pro­tect­ing state clean ener­gy rights in PJM’s capac­i­ty mar­ket click here.

PJM is the region­al trans­mis­sion orga­ni­za­tion that coor­di­nates the move­ment of whole­sale elec­tric­i­ty in 13 east­ern and Mid­west­ern states and the Dis­trict of Colum­bia. PJM oper­ates a capac­i­ty mar­ket that is designed to ensure that there is suf­fi­cient elec­tric­i­ty to meet future ener­gy needs through an auc­tion process. 

In Decem­ber 2019, FERC issued an order that mate­ri­al­ly changes capac­i­ty mar­ket rules for PJM. The order adopts a Min­i­mum Offer Price Rule (MOPR) that is expect­ed to dis­qual­i­fy some state-sup­port­ed clean ener­gy resources from receiv­ing capac­i­ty mar­ket pay­ments. In doing so, FERC’s order under­mines state clean ener­gy poli­cies and states’ pre­rog­a­tives to shape their pre­ferred ener­gy gen­er­a­tion mix, as autho­rized under the Fed­er­al Pow­er Act. 

The MOPR order has trig­gered inquiries from states, util­i­ties and oth­er stake­hold­ers about opt­ing out of the capac­i­ty mar­ket by invok­ing PJM’s so-called Fixed Resource Require­ment (FRR) Alter­na­tive. The guide con­tin­ues the non-par­ti­san Center’s tra­di­tion of under­tak­ing research that advances legal and pol­i­cy analy­sis on clean ener­gy issues by col­lab­o­rat­ing with Synapse to assist states and oth­er stake­hold­ers inside and out of PJM’s ser­vice foot­print to bet­ter under­stand the whethers,” hows” and ifs” of the FRR Alter­na­tive. Synapse is a research and con­sult­ing firm spe­cial­iz­ing in ener­gy, eco­nom­ic and envi­ron­men­tal topics.

Build­ing on a webi­nar (record­ing below) the Cen­ter host­ed in March with Synapse on the Decem­ber 2019 MOPR order, the guide pro­vides a three-step frame­work for states con­sid­er­ing opt­ing out of PJM’s capac­i­ty mar­ket with PJM’s FRR alter­na­tive. The FRR alter­na­tive is an exist­ing mech­a­nism that requires a util­i­ty to devel­op a plan to secure enough capac­i­ty to meet fore­cast­ed peak demand for pow­er for all cus­tomers with­in a des­ig­nat­ed FRR zone. The three-steps are:

Step 1: Iden­ti­fi­ca­tion of Issues. Pri­or to con­duct­ing any analy­sis, a state should iden­ti­fy the issues it wants to solve by imple­ment­ing the FRR. For exam­ple, is a state seek­ing to pro­vide capac­i­ty rev­enue for new renew­able ener­gy resources in order to pro­mote state clean ener­gy goals or is it look­ing to take more con­trol over capac­i­ty pro­cure­ment to ensure greater price sta­bil­i­ty? Iden­ti­fy­ing the issue or issues a state seeks to address will set the foun­da­tion for what type of eco­nom­ic and finan­cial analy­sis would be required and relat­ed leg­isla­tive and reg­u­la­to­ry questions. 

Step 2: Eco­nom­ic and Finan­cial Analy­sis. States should con­sid­er the full set of poten­tial finan­cial and eco­nom­ic impli­ca­tions of adopt­ing the FRR. This eval­u­a­tion should eval­u­ate state-spe­cif­ic ben­e­fits and costs asso­ci­at­ed with imple­ment­ing the FRR alter­na­tive, with spe­cial atten­tion on the fact that alter­na­tive capac­i­ty pay­ments will apply for the min­i­mum five-year peri­od required by the FRR.

Step 3: Assess­ment of Leg­isla­tive and Reg­u­la­to­ry Actions. After con­duct­ing an eco­nom­ic and finan­cial analy­sis, the last step is to assess changes need­ed to exist­ing state laws and reg­u­la­tions to enable the FRR. This step will be dif­fer­ent for states that have under­gone elec­tric restruc­tur­ing than for those with reg­u­lat­ed mar­kets. For exam­ple, restruc­tured states may need to amend laws gov­ern­ing retail com­pe­ti­tion and reg­u­la­tions regard­ing the pro­cure­ment of stan­dard offer or default ser­vice. These con­sid­er­a­tions will also impact the tim­ing of pur­su­ing a FRR plan. States with ver­ti­cal­ly inte­grat­ed util­i­ties can more eas­i­ly instruct util­i­ties to imple­ment FRRs. 

A copy of Synapse’s slides from the webi­nar pre­sen­ta­tion are avail­able here.