Week Ending December 20, 2019

PJM Order Blasted by Glick, Pallone, Renewable Groups; Future of Capacity Market Questioned

This Article Appears as Published in Foster Report No 3279

After taking more than a year to provide an order on PJM Interconnection’s capacity market, FERC on December 19 gave PJM 90 days to come up with a compliance plan and schedule its generation capacity auction based on the new rules adopted over the objections of Commissioner Richard Glick.

The order would expand the minimum offer price rule (MOPR) in PJM’s capacity market, driving up costs for 65 million utility customers in PJM’s territory, Glick said. A rough estimate by his staff put the impact at about $2.4 billion, while making new renewable power projects subject to the MOPR and favoring existing resources by making them exempt from the MOPR, he said.

Glick, developers of renewable power projects, and a key member of the House of Representatives criticized the decision as conflicting with state preferences for cleaner energy resources. The order is “an early Christmas gift to the fossil fuel industry” at the expense of utility customers in PJM, said Greg Wetstone, president and CEO of the American Council on Renewable Energy (ACORE).

Rep. Frank Pallone Jr. (D-N.J.) denounced the decision for upending state clean energy plans, saying FERC is handing a lump of coal to New Jersey and other states in PJM. “The Trump administration’s allegiance to fossil fuel interests seemingly knows no bounds,” Pallone said in a statement. “With this action, FERC is continuing to prop up the failing fossil fuel industry at the expense of both ratepayers and our environment,” he said.

Chairman Neil Chatterjee and Commissioner Bernard McNamee said the order provides a level playing field for all generators by safeguarding the competitive market from state subsidies for certain resources. Generation or demand-side resources developed under existing state subsidies are grandfathered, while any new resources under state preferences would be subject to an expanded MOPR for PJM. They deemed the ruling resource-neutral and fuel-neutral, while others pointed out that much of the new generation that would be subject to the MOPR is wind or solar power projects.

Energy Secretary Dan Brouillette posted a short statement on Twitter that FERC took strong action “to support competition in electricity markets so all America’s abundant energy sources compete on an even playing field.”

The highly anticipated order is the latest step in the PJM capacity market conundrum around state resource preferences and the most recent flashpoint between Glick, a Democrat, and the two Republican members, Chatterjee and McNamee. State preferences have included payments for nuclear resources to maintain carbon-free generation assets and other supports for certain resources, which have distorted the competitive market, Chatterjee and McNamee maintained.

States trying to advance clean energy agendas may try to end their utilities’ participation in the PJM capacity market, Glick said, adding that the effects of FERC’s policy preferences are showing up in other regions. He referred to New York regulators pushing for more control of resource decisions instead of having New York ISO subject to FERC oversight, fearing that FERC will go against state preferences.

The chairman of the Maryland Public Service Commission, Jason Stanek, who was previously a staffer at FERC and on Capitol Hill, has expressed a view that an expanded MOPR might mark the beginning of the end of capacity markets, and that might be true, Glick said.

Former FERC Commissioner Tony Clark has made similar comments after FERC in July ordered PJM to not hold its base residual auction in August and to wait for a Commission decision. State subsidies for generation resources, or preferences for certain types of resources, is not limited to PJM, but they have been brewing there in bigger numbers and FERC’s ruling could be a bellwether for how similar issues will be handled in other regions, said Clark, a senior advisor at Wilkinson Barker Knauer LLP. Capacity markets had been viewed as an added prop to ensure reliability of power supplies, but the state interventions are undercutting the concept and capacity markets could take a back seat to energy markets, similar to the design in the Midcontinent Independent System Operator (MISO), Clark said in an interview in August.[1]

The order is likely to produce plenty of litigation about what subsidies mean and administratively favoring existing resources, Glick said during the meeting and in a separate media briefing afterwards. The PJM Independent Market Monitor has said there is no point in treating generation resources differently unless the goal is to favor one over another. There are a lot of potential legal vulnerabilities of the order, and that aspect – favoring existing facilities at the expense of new ones – could be one of them, Glick said.

While Glick expressed concern that the decision could begin the demise of the PJM capacity market, Chatterjee countered that the Commission is trying to preserve the capacity market, and that doing nothing would have been more harmful. It is easy for Glick to criticize the ruling, but he offered no solution to the issues himself, Chatterjee said during a press briefing after the meeting.

The ruling reaffirms and addresses the fallout from the June 2018 order that found out-of-market payments imposed by states to support certain resources threaten the competitiveness of the PJM capacity market. Going forward, any new resource that receives a state subsidy will be subject to the MOPR. “We’re protecting the market from subsidies,” Chatterjee said.

Glick and former Commissioner Cheryl LaFleur dissented on the order from June 2018 that deemed the PJM capacity market rules produced rates that are not just and reasonable under the Federal Power Act. That ruling was a key moment in the proceeding, but the Commission has not provided any guidance since then, leaving PJM stakeholders guessing on how FERC would address the issues around out-of-market subsidies, Glick noted.

Besides establishing the expanded MOPR rules and what qualifies for exemptions, the decision addresses a complaint by generator Calpine Corp. By establishing a replacement rate for the capacity auction results, FERC has the authority to order refunds from the date Calpine filed the complaint but it declined to use that authority in the proceeding.

The order directs PJM to submit a compliance filing within 90 days, consistent with the guidance in the ruling, and provide revised dates and timelines for the 2019 base residual auction that has been delayed, along with dates and timelines for the May 2020 auction and related incremental auctions, as needed.

An expanded MOPR with few exceptions should protect PJM’s capacity market from the price-suppressive effects of state subsidies by ensuring that such resources are not able to offer their capacity below a competitive price, FERC reasoned. The replacement rate and expanded MOPR does not solve every theoretical flaw in the PJM capacity market identified by different parties, and Chatterjee commented that the Commission is not trying to reinvent the wheel with the ruling.

“There continue to be stark divisions among stakeholders about various issues that we cannot resolve on this record. Instead, we concentrate on the core problem presented in the Calpine complaint and in PJM’s April 2018 rate proposal—that is, the manner in which subsidized resources distort prices in a capacity market that relies on competitive auctions to set just and reasonable rates,” FERC said in the order.

PJM earlier this year, after not receiving guidance from FERC, said it would hold the auction in August under the tariff that was found unjust and unreasonable on June 29, 2018. Several market participants advocated for not taking that step, based on the principle that auction results could be deemed unjust and unreasonable and subject to refund or scrapped in favor of a different market design. FERC stepped in to halt the auction from being held before a ruling from the Commission has been issued, and Glick’s inability to vote on the matter until early December, due to ethics guidelines, had the PJM community eager for a decision.

Among PJM stakeholders, there has been broad opposition to a minimal-exception MOPR originally offered by PJM, and a Resource Carve Out plan, along with an extended Resource Carve Out with a repricing round in the auction, was ruled out by FERC. The Commission determined that those proposals would unacceptably distort the markets inhibiting incentives for competitive investment in the PJM market.

Chatterjee said the solution settled upon by FERC “shares some DNA” with PJM’s MOPR-Ex proposal, which was designed to expand the MOPR to apply to capacity offers from some, but not all, state-subsidized resources, without distinction between new and existing resources.

FERC is obligated to ensure that the actions of one state do not negatively affect wholesale power markets, and by drawing a line that existing subsidies would be grandfathered while imposing the MOPR on others, the Commission is improving the competitiveness of the PJM capacity market, Chatterjee said. The order is resource-neutral and designed to address the price suppression that has taken place in the PJM market for years through different state actions, he said.

Chatterjee said existing resources were granted an exemption from the MOPR because investments were made based on rules in place previously. Wind and solar power projects built under state Renewable Portfolio Standards were put in place and investments were made, so it would not be fair to “unwind those investments” he said. Most new resources added in PJM, however, will be subject to the new MOPR rules and the definition of a subsidy.

Because much of the new generation planned in PJM is for wind, solar, and other cleaner resources, Glick and others asserted that the ruling is tilted to favor fossil fuel power generation facilities and harm cleaner resources. While about 5,000 MW of solar and wind power capacity under RPS rules would be exempt from the MOPR, about 38,000 MW in the works would not be exempt, Glick said. Most states in the PJM region are moving to cleaner energy resources, and the order will keep existing generation capacity online longer, he said.

“I’m a proponent of renewable energy” Chatterjee said, insisting that the ruling will not stunt renewable power project development. The cost of wind and solar power projects have come down and they can compete on their own without state subsidies, he said.

Both Chatterjee and McNamee said they support state rights and their authority to choose generation resources. FERC is trying to ensure a competitive market and end the price suppression of state subsidies, they said. The majority is trying to preserve the ability of all resources to compete in the capacity market, McNamee said during the open meeting.

Everyone agrees that states have the authority to make generation decisions, but FERC has oversight of the wholesale market and when state decisions affect wholesale prices in organized markets, FERC has authority to address that result, McNamee said.

He said Glick accused the majority of propping up uneconomic resources by exempting existing resources from the MOPR, but at the same time he says the only way to transition to a clean energy economy is to retain subsidies for renewable resources. “I don’t believe that,” because the PJM capacity market was designed to provide a level playing field for all resources based on their costs. “We’re trying to preserve the opportunity for all resources to compete,” and renewable resources can compete on their own, without subsidies, McNamee said.

He also noted that FERC is doing nothing to affect resources’ ability to compete in energy markets or ancillary services markets. It is only addressing the price suppression of subsidies in the PJM capacity market.

The Commission directed PJM to expand the MOPR to apply to any new or existing resource that receives, or is entitled to receive, a state subsidy, unless an exemption applies. The exemptions include existing renewable resources that are participating in state renewable portfolio programs, existing demand response, energy efficiency, and storage resources, existing self-supply resources; and competitive resources that do not receive state subsidies.

The order (EL18-178, EL16-49) includes a definition of subsidies, and says any resource that does not qualify for an exemption to the MOPR may seek a unit-specific exemption, FERC said in a statement.

Resources with federal subsidies will not be subject to the MOPR, which was another point of contention at the meeting. McNamee said Congress is aware of what it’s doing when it passes laws to promote certain resources. “Congress has the authority to make that decision, and we are going to honor that decision,” he said.

No single determination in the order is more arbitrary than the exclusion of all federal subsidies, Glick wrote in his 28-page dissent. The federal subsidies for all types of resources – fossil fuels, renewables, and nuclear power — are pervasive, but FERC excludes them from the MOPR on the theory that it lacks authority to nullify the effect of federal legislation. FERC’s rationale for the MOPR applying to state subsidies is that it only addresses the wholesale market effect of the state decisions and not the state decisions themselves, but that argument falls apart when it grants the exemption to federal subsidies, Glick wrote.

“The Commission cannot have it both ways. If the MOPR disregards or nullifies federal policy, it must have the same effect on state policy. And if it does not nullify or disregard state policy, then the Commission has no reasoned justification for exempting federal subsidies from the MOPR,” Glick said in the dissent.

During his media briefing, Glick suggested that Chatterjee would benefit from spending more time with state regulators to appreciate their concerns about capacity markets and possibly pulling utilities out of organized markets. “They are extremely worried about this. And they think this is the Commission run amok,” Glick said.

He recalled at the open meeting how commissioners were on Capitol Hill during the summer and lawmakers asked about the uncertainty in the PJM proceeding. Glick quoted his boss from many years ago, former Sen. Dale Bumpers (D-Ark.), and told lawmakers “we need to do something, even if it’s the wrong thing.”

“Well, Mr. Chairman, Commissioner McNamee, you guys have exceeded my wildest expectations. This is definitely the wrong thing,” Glick said.

The result of the order will be keeping uneconomic, existing resources online, stunting the development of new generation, which was something proposed by former Energy Secretary Rick Perry in a notice of proposed rulemaking, which was rejected by the Commission, Glick noted.

PJM issued a brief statement before the order was available late in the day December 19. From the information gleamed at the open meeting, the Commission directed PJM to meet a 90-day compliance schedule and provide information on when it could hold a base residual auction. “As we prepare our compliance filing, we will engage with our stakeholders and members to discuss the substance of the order and its impact,” beginning at the Market Implementation Committee meeting on Jan. 8, 2020, PJM said.

Some groups were waiting to review the order, while the Solar Energy Industries Association (SEIA), Natural Gas Supply Association and others issued statements based on the discussion at the meeting.

While cities and states are expanding their clean energy goals, “FERC is constructing barriers that make it more difficult and expensive to choose renewable resources in the PJM capacity market. This action is misguided and does a disservice to states that are listening to their constituents’ demands for clean energy,” said Katherine Gensler, vice president of regulatory affairs at SEIA.

ACORE is “reviewing the implications of this order and our available options, but what is clear today is that FERC overstepped its authority with a decision that will ultimately lead to more pollution and higher electricity rates for consumers,” Wetstone said.

The Electric Power Supply Association (EPSA) and the PJM Power Providers Group (P3) issued separate but similar statements that they are pleased FERC reached a decision and will work to ensure that the PJM capacity market continues to provide benefits to consumers. “While P3 still needs additional time to review and understand the order, it is imperative that PJM, FERC and the PJM stakeholders work quickly to re-establish PJM’s capacity auctions so that stability and predictability can return to PJM’s markets,” said Glen Thomas, president of P3.

Since its inception in 2007, the PJM capacity market has seen the addition of 52,000 MW of new capacity while more than 41,000 MW of less efficient capacity has made the decision to retire, P3 noted. Over the same time frame, carbon emissions in the PJM footprint across 13 states and the District of Columbia dropped 30%, the group said.

EPSA President and CEO Todd Snitchler said the FERC order will help bring parties closer to building a durable and sustainable market design for PJM that meets the needs of the 21st century. Although there may need to be reforms of the PJM capacity market, centralized procurement of resources has delivered positive results for consumers and should not be minimized or abandoned, Snitchler said.

EPSA is reviewing the order and evaluating its impact on member companies’ ability to provide the benefits of competition to all Americans, Snitchler said.

The Natural Gas Supply Association (NGSA), which recently adopted a position in favor of a price on carbon, encouraged states to adopt that approach to achieve their clean energy goals while supporting competitive power markets. As states contemplate their next step based on FERC’s order, pricing carbon is the best means to reach carbon reduction goals in a manner that keeps the competitive market intact, said Patricia Jagtiani, executive vice president of NGSA.

A market-based solution that includes a price on carbon will allow a diverse pool of resources to develop to achieve carbon reductions. “Natural gas is a strong partner with renewables in attaining a clean energy future,” Jagtiani said.

By Tom Tiernan ttiernan@fosterreport.com

[1] For a past story, see, Capacity Markets, Commissioner Disharmony in Question Following PJM Order, FR No. 3261, pp. 1-3.

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