FERC Rulings to Slow Clean Energy Transition

The decisions passed down by the Federal Energy Regulatory Commission (or FERC) can have resounding impacts on U.S. electricity markets. A December 2019 FERC ruling is a reminder of this, and is likely to profoundly affect energy markets in the 13 states comprising the PJM Interconnection – a service area spanning from Illinois to New Jersey and from Michigan to North Carolina. FERC’s December 19 ruling directed PJM to substantially expand its Minimum Offer Price Rule (MOPR) to most state-subsidized power generation resources that bid in capacity market auctions. Since many new and upcoming state-supported energy investments are focused on increasing renewable generation, this ruling will disproportionately impact clean energy resources, and prevent them from receiving payments from these capacity market auctions.

Before we dive into the details of this order, let’s cover some basics. PJM is a regional transmission organization, or "RTO," and is responsible for coordinating and monitoring power generation and transmission within its multi-state electric grid. Grid operators like PJM must procure enough electricity generation for the grid to meet forecasted demand, in addition to a reserve margin to ensure system reliability. In regions like PJM, securing the necessary sources of reserve generation is accomplished through operating a “capacity market” designed to ensure sufficient generation and demand-side resources to meet future peak demand for power. Demand-side resources “provide” capacity to the grid by reducing the use of electricity during periods when demand for power is at its peak.

In most areas with a capacity market, the regional grid operator holds a yearly auction for generation capacity that the bidding power provider guarantees will be available three years from the date of the auction. Owners of generation or demand-side services offer to sell their resources at a specific price (in $/kW-day amounts), and system operators (such as PJM) purchase this capacity on behalf of utilities to ensure future electricity demand will be met. Grid operators must plan to have adequate generation available well in advance of when it is needed, since it can take quite some time for new sources of generation to be built to replace older, retiring sources.

As mentioned, system operators have a specific amount of demand they are looking to meet through capacity auctions. Once the amount of projected required capacity is met through submitted bids, the auction ends, and the market “clears.” Regardless of how low a power provider bids, all accepted bidders are paid a clearing price set by the bid of the most expensive unit required to meet projected capacity demand – the final accepted bid needed to fulfill projected reserve needs.

This is where FERC’s MOPR ruling comes into play. For years, owners of traditional power generators (such as coal and natural gas) have argued that state policies and programs designed to reduce the costs of renewable energy and meet climate goals drive down the costs of renewable generation to levels that give clean energy an unfair advantage in capacity markets. It is true that many state programs (such as zero-emissions credits and renewable portfolio standards) have succeeded in driving the increased economic viability of utility-scale clean energy. However, traditional energy market players contend that the impacts of these state programs create a price distorting effect, and that resources receiving state support submit artificially low bids into capacity markets. Because of this, they claim that they are not being paid for the true value of the capacity they provide to the grid.

FERC’s MOPR, a “Minimum Offer Pricing Rule,” requires the grid operator to apply high minimum offer price bids to all new state-supported resources. This requirement effectively bars new renewable resources from receiving capacity revenues, because it forces them to bid at a price likely to be above the capacity market auctions’ “clearing price” mentioned earlier. While it doesn’t specifically target renewables, there is little dispute that incoming renewable generation will be disproportionately and negatively impacted by this ruling.

The loss of these revenues will increase the cost of meeting state clean energy goals. What’s more, the ruling will increase the cost of capacity for all ratepayers to the tune of several billion dollars over 10 years. If the capacity from state-supported resources is not counted toward meeting PJM’s capacity requirement but is built under the terms of their contract, PJM will still purchase additional capacity in the same amount through the auction, effectively forcing ratepayers to buy more capacity than is actually needed.

A second FERC ruling for New York State rejected proposals to exempt 1,000 MW of renewable energy resources and all electric storage resources from buyer-side mitigation rules that would have allowed these resources to receive capacity market revenues. The ruling in New York State is consistent with FERC’s MOPR order in PJM, creating a barrier to achieving the State’s clean energy policies.

Synapse Energy Economics is working with states to explore alternatives to continued participation in PJM’s capacity market. Synapse staff were the featured speakers in a webinar hosted by the New York University School of Law State Impact Center. Click here to listen to the webinar. Synapse is supporting other clients as they evaluate FERC’s MOPR order and its implications for their state’s clean energy goals.