by Jeff St. John
May 28, 2020

The uncertainty weighing on PJM’s $10 billion annual capacity market hasn’t eased since the Federal Energy Regulatory Commission ordered the grid operator to remake its rules. If anything, it’s multiplied. 

We’ve already covered the details of FERC’s December order instituting a minimum offer price rule (MOPR) on state-subsidized resources across PJM’s 11-state grid system, and how it could force minimum bidding prices on new wind and solar power and existing nuclear power plants, demand response, energy efficiency and other carbon-free grid resources — potentially pricing them out of the market. 

FERC’s Republican majority says MOPR will prevent state subsidies from suppressing market prices and undermining reliability. Critics contend the MOPR is meant to protect the market position and pricing of natural-gas-fired and coal-fired generators. 

FERC’s April decision to deny more than 50 rehearing requests of its December order opens up the MOPR order to federal court challenges, but those could take years. In the meantime, PJM’s proposed compliance plan filed in March could allow some clean resources to clear the market. 

But FERC has yet to rule on whether it will accept PJM’s plan, reject it and demand a new one, or simply issue its own MOPR plan with its own prices. Nor has it reassured opponents that its definition of state subsidy won’t expand further. 

For example, FERC’s April order declared that state default service auctions will be subject to the MOPR order. Such auctions force incumbent utilities in states with competitive energy markets to contract with third-party generators to supply power to their customers that haven’t chosen an independent retail energy provider. That threatens major disruption to auctions that serve a majority of the retail load in New Jersey, Maryland, Delaware and Washington, D.C., FERC Commissioner Richard Glick wrote in an April dissent.

Even regimes that FERC’s orders appear to exclude from MOPR treatment may be threatened, according to Rob Gramlich, a former FERC adviser and president of consultancy Grid Strategies. Its recent report on the MOPR order's cost impacts noted that FERC’s April rehearing order states that voluntary purchases of renewable energy credits should not be subject to MOPR — an important clarification, since RECs or power-purchase agreements bundled with them underlie much of the U.S. corporate renewables market.

But the same order states that FERC hasn't definitively decided whether voluntary RECs "could result in capacity market distortions." If FERC later decides they do, it could force them to use minimum bids that prevent them from clearing PJM’s capacity market, depriving them of a significant share of revenue and forcing them to raise prices for corporate offtakers.

According to Grid Strategies, a typical solar power-purchase agreement project priced in the $30 per megawatt-hour range could increase by $14.58 per megawatt-hour as a result, or by nearly 50 percent. Wind power could see a less drastic, but still significant, increase of $1.90 per megawatt-hour. 

The FRR option: What it is and what it could cost

Given the expanding risks presented by FERC’s MOPR orders, many states are looking for ways to escape PJM’s capacity market altogether — particularly those planning to rely on offshore wind for their clean energy futures. Offshore wind's average floor prices of $3,146 per megawatt-day in PJM’s proposed compliance plan are far above the $140 per megawatt-day clearing price from PJM's last auction in 2018, which will almost certainly bar them from clearing the market and earning capacity revenues. 

This has led New Jersey and Maryland, two states with major offshore wind plans, to consider a “fixed resource requirement” or FRR — a PJM rule that allows utilities to depart its capacity market and secure their needs through bilateral contracts. Illinois is also debating legislation to create an FRR for utility ComEd, but it’s rooted in a more complex clean energy policy scheme designed to address longer-running challenges for the state's nuclear power plants. 

The move to an FRR is fraught with uncertainty. FERC Chairman Neil Chatterjee said in April that “state leaders will be significantly pressed to ignore” the benefits of a regionwide market to turn to an untested alternative that could raise costs. Monitoring Analytics, the consultancy that serves as PJM’s independent market monitor (IMM), has issued reports indicating that an FRR would raise capacity costs in MarylandNew Jersey and ComEd territory by as much as 29 percent in certain scenarios, or by single-digit percentage ranges in others, compared to prices from PJM’s last capacity auction. 

But a new report from Grid Strategies’ Gramlich and Miles Farmer, an independent consultant and former senior attorney for the Natural Resources Defense Council’s Climate and Clean Energy Program, says the IMM’s analyses are flawed in their assumptions. 

“The key error is assuming the FRR entities would buy from internal resources,” Farmer said in an interview. Both Maryland and New Jersey have high energy demand, limited generation and transmission, and higher capacity prices. But utilities in both states can search outside their borders for less-costly resources, he said — something that the IMM’s analyses presume doesn’t happen until they’ve fully exhausted their internal resources.

The IMM analysis also assumes that FRR utilities will pay much higher prices than those yielded by recent PJM auctions, presumably on the assumption that the relatively limited pool of resources available to FRR utilities will exercise “market power,” that is, raise their capacity price offers in hopes that the purchasing utilities won’t have many other choices. 

The IMM's decision to compare potential FRR costs to PJM’s last auction in 2018 is also a flaw because they're likely to be higher under a MOPR rule, Gramlich said. Grid Analytics’ latest analysis indicates the MOPR could increase prices from about $1 billion per year if nuclear plants can clear the auction, as PJM’s recent compliance filing would allow, to $2.6 billion per year if most nuclear plants can’t clear because FERC adopts new, higher price floors for them. 

From MOPR uncertainty to FRR uncertainty: States' unappealing choice

It appears increasingly unlikely that the states considering a fixed resource requirement will be able to craft the legislation required to do so — at least not this year, as they're consumed with dealing with the consequences of the COVID-19 pandemic.  

Maryland’s legislative session has already ended, although state lawmakers have petitioned FERC to overturn its MOPR ruling. Illinois’ emergency legislative session ended last week without action on the bills that would create an FRR option for ComEd, although they could be taken up in a "veto" session later this year. 

New Jersey’s legislative session is yearlong, and the state Board of Public Utilities is seeking alternatives to PJM’s capacity auction. This month saw multiple proposals, including an FRR plan from utilities Public Service Enterprise Group and Exelon. But that faces opposition from merchant generators represented by the Electric Power Supply Association trade group and NRG Energy, which both have their own proposals.

Moving to an FRR is not without risks, Gramlich and Farmer emphasized. Legislation to enable the shift would need to create market-like structures to bring transparency and fairness to the bilateral transactions involved. States with utilities that own generation and serve customers would have to manage the potential conflicts of interest and “monopsony power” this would entail. 

PJM’s FRR rules also require utilities choosing it to stay out of its capacity market for at least five years, a long time to linger with an alternative that could leave them worse off — particularly if PJM’s capacity market changes end up not being as costly and damaging to state renewable energy plans as groups like Grid Strategies have predicted.

FERC’s MOPR orders could also be overturned by court decisions or altered by a new roster of FERC commissioners if Democrats retake control of the presidency and the U.S. Senate. 

“I think a lot of state officials are asking these questions,” Gramlich said. “They do have the option to wait for an auction or two and then see what the next FERC or the courts do with this MOPR. If the FRR is complicated and will take a lot of work to design, then there is some appeal to them to just wait and see."

On the other hand, “since the December order from FERC, I think a lot of states have been thinking about this and studying this, and I think they’ve been learning a little bit more,” he said. “And I think some of them might decide they’ve learned enough to proceed.”