by Jeff St. John
January 08, 2020

Last month, the two-Republican majority on the Federal Energy Regulatory Commission ordered mid-Atlantic grid operator PJM to rework its $10-billion-a-year capacity market. While the details are complex, the simple effect will be to force almost all resources receiving any form of state subsidy to bid at an administratively set minimum price — a move that will likely force new wind and solar out of the market entirely, leaving the fate of other clean resources like demand response and efficiency up in the air. 

FERC Chairman Neil Chatterjee claimed that the order, which relies on a market construct called a minimum offer price rule, is needed to combat the market distortions of state subsidies across PJM’s 13-state territory. But critics say the order’s true goal is to bar clean energy resources from the market, which will force billions of dollars a year in extra costs onto power customers — largely to the benefit of otherwise economically uncompetitive coal power plants.

In a blistering 16-page dissent, Richard Glick, FERC’s lone Democratic commissioner, laid out his view of the order as a violation of states’ jurisdiction over setting their own energy policy, as well as FERC’s own rules against “arbitrary and capricious” policymaking. “Today’s order serves one overarching purpose: to slow the transition to a clean energy future,” Glick said in the statement. 

These views have been echoed by clean energy industry groups, environmental and consumer representatives, and state attorneys general that have been protesting FERC’s approach to reworking PJM’s capacity market since its 3-2 vote in June 2018 setting the process in motion. The same groups are doubtless preparing similar challenges to FERC’s new order, first as requests for rehearing to FERC, and then as demands for judicial review if FERC denies those requests. 

Unfortunately, “FERC is likely to sit on that rehearing request for a long time” if its treatment of previous challenges is any guide, Ari Peskoe, director of the Electricity Law Initiative at Harvard University, said in an interview this week.

For example, the Illinois Attorney General’s Office filed a rehearing request soon after FERC’s 2018 order but still has not received a reply more than a year and a half later, Peskoe noted. (Illinois has asked the U.S. Court of Appeals for the Seventh Circuit to review the request.) 

PJM’s complicated and contentious path to compliance 

Meanwhile, FERC is rushing ahead. Its Dec. 19 order gave PJM 90 days to submit a compliance plan, with the goal of scheduling two auctions under the new rules this year — one to replace the auction that PJM was forced to delay throughout 2019 and one for 2020. 

This week, PJM’s Market Implementation Committee held its first stakeholder meeting on how it intends to comply with FERC’s order by its March 2020 deadline. “One option is for states to really press PJM hard, to do everything under their discretion to lessen the impact” to different state-supported resources throughout this process, Casey Roberts, staff attorney with the Sierra Club’s Environmental Law Program, told GTM this week.  

One of the biggest questions is how PJM will set the minimum bid prices that FERC is demanding, she said. For example, FERC’s order gives PJM some flexibility in determining the minimum price of new demand response and energy efficiency resources. 

By contrast, FERC’s decision to set minimum bids for new wind and solar resources based on their construction costs as well as the cost of energy they deliver — a calculation called net cost of new entry — is almost certain to price those resources out of the market, according to an analysis by Advanced Energy Economy

PJM will also need to create a system to track every resource to see if it’s receiving anything FERC considers a state subsidy, and evaluate every resource that requests one of the many exemptions to the minimum offer price rule that FERC’s order makes available, Peskoe noted. 

It’s still unclear whether PJM’s plan will meet FERC’s approval when it’s submitted, or how long it might take to set up the replacement auctions that FERC has called for. But given the pressure to resume PJM’s capacity market, “I fully expect there to be an auction under these new rules by September, or something in that range,” Peskoe said. 

Even so, as Glick writes in his dissent, it’s likely that PJM will continue to face legal challenges to the way it implements what he views as an illegal order from FERC. In that light, “It will likely be years before we have a concrete understanding of how the subsidy definition works in practice, or resources know for sure whether they will be subject to mitigation.” 

A way out?

FERC’s order ends an 18-month period of delay and uncertainty for the nation’s biggest capacity market, but it opens up an even more contentious battle over its future. That’s because FERC’s decision could drive many of the states served by PJM to consider more radical alternatives — including removing themselves from the market entirely. 

“The most obvious and significant action that states can take right now is to require their utilities to use the Fixed Resource Requirement,” the Sierra Club’s Roberts said.

The Fixed Resource Requirement, or FRR, is PJM’s program to allow utilities to opt out of its capacity market and secure their energy needs through bilateral contracts instead. Since 2007, it’s been used only rarely by utilities, including AEP in Ohio, Indiana and Michigan, and Duke Energy in Indiana. 

But this last-ditch effort is emerging as a likely next step for PJM states such as Illinois, New Jersey, Maryland and Ohio with programs that could be undermined by FERC’s order. Those include zero-emissions credits for nuclear power plants; utility mandates for renewable energy, demand response and energy efficiency; or even voluntary participation in renewable energy certificate and regional carbon-trading programs. 

In fact, Illinois, whose nuclear zero-emissions credit program sparked the power generator's complaint that led to FERC’s decision, has already been planning an escape from PJM. Part of the Clean Energy Jobs Act, the state’s proposed 100 percent clean energy bill introduced last year, includes shifting authority for procuring capacity to the Illinois Power Authority — a step taken specifically to guard against an order like the one FERC issued last month. 

Illinois’ approach is backed by Exelon, the company that owns Chicago-area utility Com Ed and the nuclear power plants that receive the zero-emissions credit subsidy.

PJM’s independent market monitor analyzed the potential market effects of Com Ed moving from its capacity market to an FRR approach and reported last month that it would likely raise capacity prices for Com Ed customers but lower capacity clearing costs across the rest of PJM. 

Lawmakers in Maryland, another state with aggressive clean energy legislation in the works that’s also served by utilities owned by Exelon, have also begun to explore the possibility of legislation to allow this kind of carve-out from PJM’s capacity market, Roberts said. 

States with vertically integrated utilities, including Virginia, West Virginia, Ohio and Indiana, already allow FRR, Mark Kresowik of Sierra Club’s Beyond Coal campaign noted. Those with competitive retail energy markets such as Maryland, Illinois, New Jersey and Washington, D.C. need to pass new laws in order to allow their utilities to choose the FRR option, he said. 

It’s also likely that “this is the path that a lot of public utilities will be taking, since they’re particularly enraged by this ruling,” he said. 

FERC’s order would force all publicly owned utilities to apply the minimum offer price rule to all new resources, essentially declaring “the entire public power model to be an impermissible state subsidy,” Glick states in his dissent. 

Utilities contemplating the move to FRR could face significant challenges in securing cost-effective capacity outside PJM’s market. But given the alternative of participating in a PJM capacity market that discounts their largest and fastest-growing resources, “I really think states are going to go the FRR route,” Kresowik said. 

This departure of states and utilities, in turn, could undermine the ability of PJM’s capacity market to serve its role of assuring grid reliability by removing more and more of the region’s actual grid-serving resources from the grid operator’s purview. But then, according to its opponents, that’s exactly what FERC’s order will do to PJM’s capacity market anyway by barring most of the resources expected to be built in future years from participating on a level playing field with legacy fossil fuel plants. 

As Glick wrote, under FERC’s order, “as a resource adequacy construct, the PJM capacity market will increasingly operate in an alternate reality, ignoring more and more capacity just because it receives some form of state support."

"It also means that customers will increasingly be forced to pay twice for capacity or, in different terms, to buy ever more unneeded capacity with each passing year," Glick wrote.

"I cannot fathom how the costs imposed by a resource adequacy regime that is premised on ignoring actual capacity can ever be just and reasonable.”