United Nations Climate Change
Our aim is to help our clients understand the potential opportunities and challenges that COP25 may have on their business.
In what many commentators have seen as a rush to craft a solution in search of a problem, PJM proposed and the Federal Energy Regulatory Commission rejected a plan to change the way PJM runs auctions to buy capacity.
FERC directed PJM to create a different plan altogether.
PJM operates the utility grid in the mid-Atlantic states and as far west as parts of Illinois and Michigan.
Two Democratic commissioners warned that the FERC action could adversely affect the legitimate authority of states to do generation resource planning, such as through state renewable portfolio standards that require a certain percentage of electricity to come from renewable energy.
The annual capacity auction program, known as the base residual auction, requires existing suppliers of capacity, and new generators that want to provide capacity to earn capacity payments, to bid in the auction to supply capacity three years in advance of the year that the capacity would be needed. The year it would be needed is called the “delivery year.”
Under the current PJM tariff for capacity, new combined-cycle gas generators not yet participating in the capacity market would have to offer a minimum price to supply capacity in a delivery year. Some gas generators are exempted; bidding is mandatory for others.
The requirement to bid is known as the minimum offer price rule or MOPR.
Existing generators have not been subject to the MOPR to date.
Under the current rules, the MOPR requirement applies only for the first auction. If a new generator’s bid clears once in the auction, then in subsequent years it would not be subject to a minimum offer price requirement. Under the current tariff, the MOPR requirement also does not apply to gas projects that meet certain exemption tests or to renewable generators or to anyone offering demand-side reduction. The MOPR also does not apply to existing capacity suppliers. However, the MOPR does apply to state-subsidized new gas-fired generation.
In 2016, Calpine filed a complaint against PJM at FERC claiming that state-subsidized generators, like existing nuclear plants that are getting price support from their states in order to keep operating, are artificially suppressing capacity prices in the market.
In addition, for the last several years PJM has observed that more renewable power plants were being built in the region and participating in the capacity market, and that other potential subsidized projects, like offshore wind projects, and existing nuclear facilities, were likely to bid to supply capacity in the future.
In April 2018, PJM filed with FERC to amend its MOPR rules. It offered two alternatives and asked FERC to choose which one it prefers. PJM took the position that taking no action in response to its filing would not be a viable option because PJM has no way otherwise to address the growing number of bids from state-subsidized suppliers.
PJM has operating capacity well above the amounts required to meet PJM’s existing demand plus reserve requirements. The demand for capacity has remained essentially flat in PJM for many years. The current tariff has not prevented new gas capacity from clearing the auction and completing construction, notwithstanding the number of competing bidders who benefit from government subsidies.
Despite these current conditions, FERC found that the existing approach was unjust and unreasonable and decided that both of PJM’s proposed tariff revisions were unjust and unreasonable, as well. It offered its own tariff revision.
However, FERC showed a lack of confidence in its own holding. It called for a “paper hearing” to assess what it had proposed, asked a series of questions that it would like the participants to address, and invited additional questions that participants might choose to have the commission consider as well. FERC gave the parties 60 days until August 28,2018 to file comments, then 30 days to respond to those comments, and proposed to wrap everything up by the first week of January 2019, in time to be implemented before the next PJM capacity auction in May 2019.
FERC made a “preliminary” proposal to change the existing PJM capacity MOPR rule in two ways.
First, it directed PJM to expand the MOPR to create a replacement minimum offer rate for all existing and new generating plants, regardless of resource type, with few exceptions.
Why does it matter whether all bidders — or just a small class of bidders like new gas-fired generators — are required to offer a minimum price in the capacity auction? Absent the requirement to bid at a minimum price, existing generators and all new price-subsidized renewable generators could offer capacity as “price takers,” meaning that each could offer a zero price that is guaranteed to clear the auction and still receive the auction’s market clearing price. With FERC’s proposal, on the other hand, there is a risk that such generators will have to offer prices at levels that will not clear the auction and, therefore, receive no capacity payments.
FERC fully recognized that its proposal would mean that the MOPR would apply not only to unsubsidized generators, but also subsidized generators. It recognized that by holding subsidized resources to the MOPR standard, some ratepayers may be obligated to pay for capacity twice — “both through the state programs providing out-of-market support and through the capacity market.” This could happen if such a generator’s bid did not clear in the auction. FERC said the courts have recognized this risk, but that the courts have found the risk is reasonable given that states retain the right to pursue their own generation policy goals.
However, to mitigate the risk of double payment, FERC proposed a second change to the MOPR rule, called the FRR alternative option. This option would allow, on a case-by-case basis, a utility or other load-serving entity with generation receiving out-of-market support to choose to remove that generation from the PJM capacity market along with a commensurate amount of load, for some period of time.
The amount of time any such generation would be removed is open for public comment. This option would continue to allow the generation to remain on the PJM system and participate in the energy and ancillary services markets, even though it has dropped out of the capacity market. Under current PJM rules, a utility or other load-serving entity would have been required to remove its entire load footprint (the so-called fixed resource requirement or FFR) and exit the capacity market entirely before it would be released from bidding in the annual capacity auction. The proposed alternative (FRR alternative) would allow a load-serving entity to remove only the capacity that would benefit from the exclusion.
These proposals would ensure that all generators that participate in the PJM capacity market will have to offer competitive prices.
However, one risk of the FERC approach may be that the capacity market will shrink dramatically, thus reducing competitive markets generally and turning PJM’s market into only a residual capacity market, as more and more generators with out-of-market support exit the capacity market altogether. Calpine recently expressed concern about this potential outcome from FERC’s proposal.
In setting the proceeding for a paper hearing, FERC asked interested parties to address a number of important open issues. The issues include the following.
First, what should be considered an out-of-market subsidy? PJM had proposed to define them broadly to include any market payments, concessions, rebates or subsidies directly or indirectly from any government entity, or received in any state-sponsored or state-mandated processes, that are connected to construction, development, operation or clearing of the capacity in any capacity auction
But PJM wanted to exclude a laundry list of items from the definition. It wanted to exclude subsidies that promote general industrial development in an area. It would also exclude subsidies that encourage a power plant to be put in one county or locality rather than another one. Federal tax credits and other tax benefits that are available to eligible generators regardless of location would also be ignored.
Second, FERC asked for advice on what categories of generators should be exempted from bidding under the MOPR.
Third, it asked whether federal sources of out-of-market support should be addressed by the commission action.
Fourth, it asked how long generation receiving out of-market support for which a load-serving entity has chosen the case-by-case FRR alternative should be required to remain outside of the auction.
In the meantime, FERC has established that the proposed MOPR revisions will be effective retroactively to when Calpine filed its complaint in 2016. This could require refunds to be paid to some generators. The significance of the refund requirement is unclear, as FERC did not specify what rate would be used to make refunds.
Recognizing that the timing is tight for a final order before the next PJM auction, FERC offered PJM the option of coming back to FERC to ask for a delay in the 2019 auction until later in the year.
It is unclear whether FERC would permit PJM to seek a waiver to keep the current tariff in place for the 2019 auction until FERC is able to sort things out.
To add to the uncertainty, promptly upon the issuance of the FERC order, Commissioner Robert Powelson announced he will resign in August, leaving the commission with only four commissioners and a possible deadlock of 2-2 in reaching a final order. Commissioner Powelson was part of the 3-2 majority that issued the opinion, with the two Democratic commissioners vigorously dissenting.
In her dissenting opinion, Commissioner Cheryl LeFleur agreed that the PJM capacity repricing proposals should be rejected, but would have been willing to work with PJM’s alternative proposal, called MOPR-EX, with some modification to protect resources under state RPS programs, or have PJM consider the new construct approved by FERC in March 2018 for ISO-NE’s modification to its MOPR for its capacity market, known as “Competitive Auctions with Sponsored Policy Resources,” or CASPR.
Under CASPR, ISO-NE proposed to maintain its current MOPR that applied only to new resources and exempted up to 200 megawatts of renewable energy each auction year. Then ISO-NE would conduct a second-stage or substitution auction. The capacity price to be paid to all cleared bids would be determined by the first auction. But in the second, substitution auction, existing generators that made successful bids to supply capacity in the first auction will be permitted to offer to retire their capacity in the second substitution auction at a certain price.
Any state-sponsored resources whose bids did not clear in the first auction would be allowed to bid in the substitute auction to acquire the capacity from those existing resources that offer to retire their capacity in the substitute auction. This is expected to allow retiring existing capacity to receive a somewhat lower than capacity-clearing price to exit the capacity market permanently and also allow new state-supported generators to obtain rights to supply capacity at the market clearing price.
Commissioner Richard Glick’s opposition to the FERC majority decision was more fundamental. He argued that the FERC order stepped on the state’s exclusive authority over electric generating facilities. In his view, the record did not support the finding that there is a resource inadequacy problem in PJM or that the capacity market is otherwise unjust, unreasonable, unduly discriminatory or preferential.
PJM has been evaluating ways to maintain reliability and improve competitive markets for the last several years. It has also been working diligently to comply with FERC’s directive, following its rejection of a Trump administration proposal to force PJM and other regional organizations to favor coal and nuclear plants, to determine the best approach to maintain resilience of its vast interconnected system.
PJM is the largest and most mature regional power market, with about 185,000 megawatts of installed capacity spread over 13 Mid-Atlantic and Midwestern states and the District of Columbia.
Pressure from the Trump administration to do something, for what clearly appears to be political rather than reliability reasons, seems to have caused PJM to rush to judgment with a half-baked proposal, and to cause FERC to rush to decide the matter with another half-baked alternative.
It remains to be seen whether, after all of the FERC deliberations are completed and the final decision lands in the court of appeals, the appeals court will decide that FERC lacked authority to modify the existing MOPR procedure as suggested by one of the Democratic commissioners, Richard Glick. The commission cannot modify the existing tariff unless that tariff was unjust and unreasonable. This was the result of a court’s decision in 2017 on review of FERC’s previous attempt to modify the PJM tariff when PJM made a filing to FERC to modify its capacity tariff in a different manner.
All of this PJM action is being played out at a time when PJM and FERC were hearing the sounds from the constant drumbeat from the White House and the US Department of Energy to take action to keep uneconomic coal and nuclear plants operating, claiming an emergency that PJM and every other regional transmission organization said does not exist in reality. In other words, the federal executive branch is pushing hard for federal subsidies that would clearly suppress prices of competing gas generation and other technologies, like renewable power and energy storage, that utilities, state commissions and the general public support for both economic and environmental reasons.
FERC has recognized that its solution needs work, calling it “preliminary” and seeking comments on a number of highly important issues that should have been thoroughly evaluated before issuing any directive.
It may be that FERC will be able to absorb all of the comments received and produce a better product and market structure that nimbly adjusts to the rapidly changing power resources that the country seems to be demanding despite federal executive opposition.
However, there is also a significant risk that a poorly redesigned market structure will undermine an extremely successful competitive market system and cause renewable power to become less viable over time following the expiration of federal tax credits and possible removal of their resources from the capacity markets. In any event, whatever final order emerges from this proceeding will be challenged in court, causing additional uncertainty for future PJM annual capacity auctions.
IMO 2020 is almost upon us. Readers are well aware of the impending switch to 0.5 percent fuel mandated by Annex VI of MARPOL which will cause an anticipated drop in HSFO demand, the potential hazards of new untested LSFO blends, the concerns around scrubber operations, the debate over open loop versus closed loop, and the myriad of other risks associated with the impending regulatory change.