by Jeff St. John
March 16, 2018

Last week was a busy one for the Federal Energy Regulatory Commission. First, FERC received reports from all of the country’s grid operators, describing their first steps toward meeting the agency’s demand for an examination of the country’s resilience to grid emergencies. 

Among the cautious and exploratory responses, mid-Atlantic grid operator PJM’s report stood out, in asking FERC to consider another of its proposals -- a more controversial energy market price formation reform -- as an integral part of its efforts to keep the grid secure. 

Then, in an unusual split vote, FERC approved a controversial capacity market reform proposal from ISO New England, one that includes a proposal to use a market construct known as a minimum-offer price rule, or MOPR, that many industry observers worry could undermine state clean energy and carbon reduction policies. 

The one-two punch of PJM’s push for price formation as part of resilience, and the narrow approval of ISO-NE’s capacity market proposal, has led to a flurry of commentary from clean energy advocates, proponents of state carbon reduction policies, and other parties. 

The central concern is that these two filings represent the start of a new push at FERC to reward coal-fired power plants now struggling to compete against cheap natural gas and increasingly cheaper renewable energy. 

PJM’s move to link controversial market reform to grid resilience 

Mid-Atlantic grid operator PJM’s response to FERC’s resilience order (PDF) stood out from the rest of the responses from the country’s independent system operators and regional transmission organizations. While these largely approached the question of how to change market rules and tariffs to support resilience with an abundance of caution, “PJM asked for extensive action for FERC on a plethora of issues,” according to Robbie Orvis, policy director at Energy Innovation. 

“Notably, their ask includes FERC directing the RTO to submit tariff changes in support of resilience in relatively short order, and in particular they are focused on pushing through their price formation reforms as part of this process (page 78 of the PJM comments).” 

PJM proposes to allow inflexible units such as coal and nuclear plants to “set price under certain circumstances” -- a departure from traditional market designs that use the marginal cost of delivering energy to set price. But the trends of cheap natural gas, flat energy demand and growing wind and solar contributions have undercut these prices for both marginal and baseload market participants -- and, according to PJM, undervaluing the qualities that baseload plants provide the grid. 

But the price formation reform has been opposed by clean energy and consumer groups since it was first floated late last year, since it would raise energy prices in support of what they say are otherwise uncompetitive and dirty power pants. PJM projects 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. 

Beyond clean energy and consumer groups, PJM’s proposal has been opposed by its market monitor, Monitoring Analytics, and by a 10-to-2 vote of the Organization of PJM States, Inc. (OPSI), representing the states that could see prices rise for their residents.

For many observers, the issue of grid resilience seems distant from the complex question of how to balance baseload and flexible resources in a changing energy environment. But PJM’s resilience filing put the price formation proposal front and center, stating that it’s an "important and inter-related component of ensuring grid resilience.”  

PJM has also asked FERC to push for an expedited deadline of nine to 12 months after its final resilience decision for PJM, as well as the rest of the country’s grid operators, and non-market transmission operators in other parts of the country -- to file any proposed market reforms and related compensation mechanisms to address resilience concerns.

“PJM believes that modifications to these market constructs could and should be made to align with current reliability needs and resilience objectives,” it wrote. While its price formation market reform is proceeding separately, with a plan expected to be filed later this year, any “early-on expression of desire by the Commission to align the timing of these efforts will be helpful to ensuring that the Commission considers both sets of reforms informed by the impact one may have on the other.” 

As Michael Panfil, director of federal energy policy for the Environmental Defense Fund, noted in a tweet, “PJM's resilience filing continues to push for [its] price formation proposal, despite it being liked by no one (ISOs, independent market monitors, stakeholders) and not being relevant to the topic.” 

Orvis noted that PJM’s proposal also asks for permission to take "non-market operations" during emergencies that are now outside its purview, like providing “cost-based compensation” -- that is, payments out of its market constructs. While it hasn’t filed its official proposal yet, it’s expected to do so as early as next week, he said. 

Caution amidst change from other grid operators 

PJM’s “laundry list of asks from FERC” stands out from the rest of the responses to FERC’s resilience order, Orvis said. ISO-NE, New York ISO, California ISO, the Southwest Power Pool (SPP) and the Midcontinent Independent System Operator (MISO) all presented filings that were much less assertive about defining what makes for a more resilient grid and how to value those attributes, he said. 

Even though most ISOs agreed with FERC’s fundamental definition of resilience, for instance, “There is still broad uncertainty on what it means to certain RTOs, how it differs from reliability or other practices already undertaken at the RTOs, and why there is a role for FERC,” he said. “Given the range of comments from the RTOs on what resilience is and how it is maintained (ranging from energy price formation in PJM, to gas supply in ISO-NE, to transmission planning in MISO), it seems clear that no consensus exists on exactly how FERC would address resilience or why FERC involvement is even necessary.” 

At the same time, “It’s abundantly clear that the RTOs think they can and are handling resilience through existing practices,” he wrote. Even in cases where grid operators laid out particular market concerns in great detail, as ISO New England did with its issues of natural-gas delivery infrastructure, the filing “ultimately concluded without requesting anything from FERC,” he noted. “So in essence, all the RTOs, perhaps with the exception of PJM, highlighted the role of the stakeholder process and reaffirmed their commitment and ability to address resilience.” 

As EDF’s Panfil noted, “One common theme thus far in the ISO proposal is the importance of a regional approach and of the value of a stakeholder process. These are key themes that help to build better outcomes.” 

GTM Research analyst Colleen Metelitsa noted that some of the filings questioned whether FERC’s role in resilience might not end up being supplanted by the role played by NERC -- the North American Electric Reliability Corp., which oversees the critical infrastructure protections (CIP) and other key regulations related to grid resilience. 

In fact, Texas grid operator ERCOT, which isn’t under FERC jurisdiction, still filed a response on Friday to lay out its view of how it manages resilience. “ERCOT specifically calls out that they are essentially filing comments because they think it will end up under NERC,” Metelitsa said. 

“Most of the focus from the ISOs is that they do a lot of resilience work already,” she noted. Beyond this core issue, several ISOs, including ISO-NE, ERCOT, MISO and NYISO, highlighted the need for better coordination between electric and natural-gas transmission systems. 

A controversial capacity pricing order

Amid the resilience filings on Friday, FERC narrowly passed an order approving ISO New England’s new market pricing proposal -- a controversial approach to splitting its capacity market to better balance zero-marginal-cost renewable energy with baseload power plants.

But the most controversial part of the order came in a single sentence that laid out how FERC intends to use a market mechanism known as a minimum-offer price rule, or MOPR, to manage conflicts between state clean energy and carbon reduction policies and the proper operation of energy markets. 

In fact, two of FERC’s five commissioners offered stark dissenting opinions on the MOPR. Commissioner Cheryl LaFleur wrote that the MOPR shouldn’t be used as a “blunt instrument” to deal with state policy conflicts with energy markets. 

And Commissioner Richard Glick called the decision a “a historically serious misstep,” and noted that it “is not adopted by a majority of the Commissioners that support the order,” indicating a significant conflict within the commission that could fuel procedural and legal challenges to the order.

PJM’s new capacity market reform proposals are the next arena where MOPR issues could emerge, Orvis said. To date, PJM has proposed an option for a two-part auction similar to the one that ISO-NE has implemented, as well as two options that would use different forms of MOPR, he said. 

The reason for the multiple options is that PJM was unable to come to consensus in its stakeholder process, he noted. In fact, in a November vote, PJM stakeholders chose by a two-to-one margin to keep the status quo for capacity markets -- although PJM moved ahead with its proposals anyway. 

It’s unclear how FERC will manage the complex issues at hand in these multiple dockets. But FERC Chairman Kevin McIntyre told reporters at an energy conference last week that it’s highly unlikely the commission will not take some kind of action as the result of the resilience filings. 

“Taken together, I would say FERC’s response to the resilience filing so far -- specifically McIntyre’s comments as well as their language approving the ISO-NE capacity filing -- point to a FERC that is more involved in the RTOs and perhaps more focused on addressing revenue challenges for incumbent generators,” Orvis said. “This is concerning given that market forces are largely to blame for low revenues and that the remedy is to let unneeded capacity retire, not to reform markets to juice revenue, and definitely not to mitigate state policy.”