Grid resilience is one of the hottest issues in U.S. energy policy, with last year’s hurricanes in Texas, Florida and Puerto Rico showing the stark consequences of failing to prepare the grid to withstand and recover from catastrophic events.
But it has also become intertwined with the Trump administration’s efforts to bail out economically uncompetitive coal and nuclear power plants, from Energy Secretary Rick Perry’s attempt to get the Federal Energy Regulatory Commission to provide coal and nuclear plants with out-of-market payments, to the continuing possibility that DOE will use emergency powers to keep FirstEnergy’s bankrupt coal and nuclear fleet afloat.
PJM Interconnection, the country’s largest interstate transmission operator, is the nexus of these interlocking policy battles. Not only is it the home of most of the coal and nuclear plants facing closure, it’s also alone among the country’s six interstate grid operators in linking the issue of resilience specifically with policy proposals that would help coal and nuclear plants at the expense of the cleaner-energy competition.
PJM’s outlier approach: Make grid resilience a market issue
Last week, PJM joined in with the coal and nuclear industries — and against the rest of the country’s grid operators — to request that FERC make the linkage between resilience and market reforms explicit for the rest of the country as well.
“Initiatives to enhance resilience of the grid should not, in PJM’s view, necessarily stop at the borders of any particular RTO or ISO, or for that matter be limited solely to RTO and ISO footprints,” it wrote in its final filing for FERC’s resilience proceeding. This docket, opened in January, was created as part of the same vote that rejected Perry’s request for market supports for coal and nuclear power plants, and asked RTOs and ISOs to define grid resilience and study how to improve it.
PJM also differed from its fellow ISOs and RTOs in its initial March response to FERC’s resilience docket, by proposing a number of market rule changes and asking for a nine- to 12- month deadline from FERC to file detailed rules for all of these proposals.
The stark difference of opinion between PJM and its fellow grid operators was made clear last week, when ISO-NE, New York ISO, California ISO, the Southwest Power Pool and the Midcontinent Independent System Operator took the unusual step of making a joint filing before FERC. The filing asked the commission to “reject PJM's requests and allow individual RTOs/ISOs to pursue the resilience-related issues and initiatives,” based on what their stakeholders have identified and on their own timeframes.
That’s the approach also endorsed in filings from the Environmental Defense Fund, the Sierra Club and the Natural Resources Defense Council, as well as mainstream utility trade group the Edison Electric Institute and the generator trade group Electric Power Supply Association.
These critiques center on the fact that there’s little evidence that PJM is facing any kind of resilience problem that requires a short-term fix. As multiple filings noted, PJM’s own studies have shown that it can manage grid reliability — the most commonly used standard for keeping the grid running safely across all conditions and circumstances — as more coal and nuclear power is replaced with natural gas, wind and solar power. A more recent study indicated PJM could manage the loss of FirstEnergy’s three nuclear plants slated for closure without additional threats to reliability.
“PJM has not, to my knowledge, offered analytic evidence that there is some kind of existential crisis,” said Michael Panfil, director of federal energy policy for the Environmental Defense Fund. Indeed, PJM reported last week that it’s expecting the reserve margin this summer to exceed 28 percent, nearly twice its required 16.1 percent, another sign that it is not facing an immediate threat to grid reliability.
Instead, PJM’s concern seems to be that “energy prices are too low,” he said. This brings in the other thread to PJM’s resilience push — a set of capacity market price formation reforms that could not only bolster coal and nuclear at the expense of the competition, but also create a new and troubling precedent for federal energy regulations to trump state energy policies.
A question of market balance versus states’ rights
PJM’s resilience filing comes a week after the final proposals for changing capacity markets were filed before FERC. PJM has closely linked these proposals with its resilience efforts, calling them an "important and inter-related component of ensuring grid resilience.”
But ever since they were first introduced last year, these proposed changes to PJM’s Reliability Pricing Model rules have drawn the opprobrium of clean energy advocates, utility and generator trade groups, consumer groups, and pretty much every class of PJM stakeholder except coal and nuclear power groups.
In fact, in a November vote, PJM stakeholders chose by a 2-1 margin to reject the changes in favor of keeping the status quo for capacity markets. PJM’s proposal has also been opposed by its market monitor, Monitoring Analytics, and by a 10-to-2 vote of the Organization of PJM States, Inc., representing the states that could see prices rise for their residents.
The top-line objection to PJM’s proposal is that they would raise energy prices by allowing baseload coal and nuclear power plants to set prices in capacity markets, which procure energy to be delivered in future years. PJM has projected the plan would lead to increased total energy and capacity market costs of between 2 percent and 5 percent, per year, or between $440 million and $1.4 billion.
PJM says this adjustment is needed to properly value baseload coal and nuclear plants against the rising tide of cheap natural gas, flat demand for electricity, and state-policy-driven growth in wind and solar power.
But opponents call them an expensive and unnecessary interference in capacity markets that are working just fine on their own, and have already undergone significant changes in response to grid reliability challenges such as the 2013 polar vortex. They’ve also critiqued the central premise behind the changes — that PJM needs to do something to balance the effects of state incentives in bringing low-cost clean energy to market.
The first proposal, called Capacity Repricing, would create a two-stage capacity auction that would exclude certain low-cost resources (including wind and solar power that are part of a renewable portfolio standard) in the initial price-setting phase. It’s similar to a two-part auction proposal narrowly approved by FERC for ISO New England in March. Critics say this would raise capacity prices and thus energy costs for all consumers, although it wouldn’t bar low-cost wind, solar, demand response or energy efficiency from participating.
That’s not necessarily true of PJM’s second proposal, known as MOPR-Ex, which could lead to some state-subsidized units being effectively barred from receiving capacity commitments. That’s because it would extend the Minimum Offer Price Rule (MOPR) — a market mechanism designed to prevent market gaming by utilities that both own power plants and buy capacity — to set a certain minimum price for resources, no matter their actual cost to compete.
The potential for a troubling precedent
Using the MOPR to mitigate state policies is a particularly threatening approach, since it enshrines the idea that FERC has the authority to interfere in state policies around mitigating climate change and improving public health, Panfil noted.
“At a really fundamental level, states provide inputs — labor policies, tax policies, the price of the resources,” he said. “In ordering those inputs and dispatching an end product, that’s where a grid operator can be really impactful and helpful. That division of authorities has always made sense to me, and that’s how it’s always been done.”
But extending a rule designed to prevent market manipulation to suppress the low prices of state-incentivized capacity resources “strikes me as a fundamental shift in responsibilities and roles,” he said. The idea is that PJM, or any grid operator, should adapt to these market inputs, rather than create market constructs to counter their effects, he said.
While PJM says that these state policies suppress capacity market prices, it doesn’t apply the same premise to various subsidies for fossil fuels, noted Miles Farmer, NRDC staff attorney. “PJM never says why it treats revenues earned under state RPS and nuclear support programs differently from any other state property rights which flow through its markets.”
Given these inconsistencies, as well as the lack of a clearly defined problem that needs solving, opponents are hoping that FERC will reject both of PJM’s market proposals. “We don’t want solutions to things that we think might be a problem; we want a well-defined and articulated problem,” Panfil said. “If we can’t do that as a sector, then doing nothing doesn’t strike me as the extreme choice. It strikes me as the sensible default option.”
Unfortunately for opponents of PJM’s proposal, FERC has recently introduced the concept of using the MOPR for just these kinds of state-market conflicts. “Absent a showing that a different method would appropriately address particular state policies, we intend to use the MOPR to address the impacts of state policies on the wholesale capacity markets,” the agency wrote in its March ruling on ISO-NE’s capacity pricing proposal.
At the same time, the ISO-NE order was only passed by a bare 3-2 vote, and the paragraph proposing the use of MOPR as a default solution was decried in separate statements by Commissioners Cheryl LaFleur and Richard Glick. This muddled stance has left industry observers feeling quite uncertain about how FERC will decide on PJM’s case, or whether its decision will set new and possibly troubling precedents.
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