The Federal Energy Regulatory Commission has told mid-Atlantic grid operator PJM that it can’t hold its capacity auction set for August. Instead, PJM must instead wait for a FERC-approved replacement to its existing tariffs, ruled invalid last year, before going ahead.  

Thursday’s unanimous decision from FERC’s four commissioners was not entirely unexpected, given that PJM had planned to conduct its August auction under tariffs that FERC has declared “unjust and unreasonable” for how they handle state-incentivized wind, solar and nuclear power resources.

The last-minute delay may indicate that FERC and PJM are close to negotiating an alternative plan in time for FERC to announce a proposed decision at their next scheduled open meeting in mid-September. 

But the delay — combined with FERC’s inaction on alternative plans submitted in October 2018 — may add further turmoil for power plant owners, demand response providers and other market players that have been waiting for more than a year to learn how the country’s biggest forward capacity market will eventually work, and when its multibillion-dollar auctions will resume. 

And with one of the two Democratic FERC commissioners departing next month, FERC will soon have a 2-to-1 Republican majority to manage how PJM’s capacity auction rules will come together.

Renewables advocates who have argued that PJM’s capacity market already unfairly privileges coal, nuclear and natural-gas plants are worried the Republican majority may lead to rules that further disadvantage cleaner energy options.

Decision upends PJM capacity market

All four FERC commissioners concurred in Thursday’s decision, which denies PJM’s motion from April to allow its Base Residual Auction  for the 2022-2023 delivery year to move ahead in August under its existing tariff. PJM had already postponed the auction from its usual May date, as it awaited FERC’s response to its proposed redesign.

Last year’s 3-2 split ruling decision was a shock to markets, as it went far beyond the issue of adjudicating complaints from both fossil fuel generators and renewable energy over PJM’s latest revisions to its capacity market rules.

Instead, it expanded on PJM’s original argument that its capacity market is distorted by state-subsidized resources — namely, nuclear power plants receiving state zero-emissions credits, but also wind and solar power backed by state renewable portfolio standard programs — to declare the entire tariff “unjust and unreasonable."

This decision was strongly criticized by the two Democratic FERC commissioners who voted against it as an unjustified intrusion into the authority of states to make their own energy policy. State attorneys general and utility regulators have joined in the criticism, as have clean energy and environmental groups. 

In another departure from standard practice, FERC’s ruling set up a rushed, 90-day “paper docket” process, instead of a lengthier stakeholder process, to come up with an entirely new set of tariffs to replace those it had found unjust and unreasonable. This process yielded proposals from PJM and alternatives from stakeholder groups in October.

But since then, FERC has failed to act, and PJM’s latest update on this matter states that FERC "has no deadline to do so.”  

Stakeholders, commissioners react 

Democratic FERC Commissioners Cheryl LaFleur and Richard Glick excoriated last year's decision in their concurrence statements.

“At the time, I called the June 2018 Order an act of regulatory hubris," LaFleur, who is retiring next month, wrote. "However, given the passage of time, the uncertainty created by the Commission might better be labeled an act of regulatory malpractice.”

Still, both agreed that delaying the auction was the right choice, despite the market turmoil it may create.

Many of PJM’s capacity market conflicts have been between fossil fuel power plant owners and states with renewable energy mandates and nuclear power zero-carbon incentives. But most of these parties have united against the idea of further delaying PJM’s capacity auction, according to comments to FERC.

The generator trade group Electric Power Supply Association, for example, wrote that “delaying the August 2019 Base Residual Auction beyond August 2019 could have ‘serious market impacts,’ especially if the auction is delayed to May 2020, taking nearly a full year off the three-year forward period.”

Rob Rains, analyst for Washington Analysis, noted that PJM would still need to file proposed tariff language for review and approval by FERC, followed by a 15-day comment period. That would push earliest possible approval to “sometime before Halloween,” and an auction to “sometime around Thanksgiving."

A broader conflict over fossil fuels vs. state-subsidized clean energy

The PJM region has seen major new state subsidies emerge in the past year, including Ohio’s new nuclear and coal bailout law, House Bill 6. This bill will add FirstEnergy’s two nuclear plants in Ohio to the list of those receiving zero-carbon energy credits in PJM states including Illinois and New Jersey

Delaying the capacity auction could allow FERC and PJM the time not only to create an acceptable alternative tariff, but also to take these new state subsidies into account, George Katsigiannakis, vice president of wholesale power markets at ICF, noted in a Friday email. 

“Following the approved subsidies in Ohio, prices would have been lower had the auction happened,” he wrote. “This gives FERC a chance to develop a solution to the mitigation problem we are seeing. Capacity prices should rise, all else being equal.” 

However, given the shifting political balance at FERC, clean energy groups are concerned that PJM’s proposals to disadvantage state-incentivized resources in the capacity market may become a central part of the new tariff.

Citing anonymous sources, Politico this week reported that FERC under Republican Chairman Neil Chatterjee is planning “moves that will benefit coal and nuclear power plants at the expense of wind and solar," including resolving the “longstanding impasse over state energy subsidies in the PJM power market.” 

Republican Commissioner Bernard McNamee, who previously helped design the Trump administration plan to force out-of-market payments to "fuel-secure" coal and nuclear plants that was unanimously rejected by FERC last year, supported the July 2018 order in his concurrence.

"I disagree with certain characterizations put forth in my colleagues’ concurrences," he wrote. "The Commission engaged in a thorough analysis and considered the pleadings of dozens of participants and ultimately determined that PJM’s tariff was unjust and unreasonable because the current [rule] 'fails to mitigate price distortions caused by out-of-market support granted to [non-natural-gas-fired] new entrants or to existing capacity resources of any type.'"