EPSA: State subsidies threaten PJM's Capacity Market
The following is a Viewpoint by John Shelk, President and CEO of the Electric Power Supply Association (EPSA).
Last month, eight senior executives from independent power producers representing most of the competitive new generation built in PJM since 2010 wrote to the Federal Energy Regulatory Commission (FERC) about the pending capacity market proceeding on state-subsidized resources. Four of the eight signatories were CEOs of EPSA members.
Mike Hogan, senior adviser at the Regulatory Assistance Project, took them to task in a Utility Dive Viewpoint for doing so. EPSA welcomes the opportunity to contribute to the ongoing debate on these issues by responding to Mr. Hogan.
Mr. Hogan's criticisms boil down to three:
- PJM's capacity market should be eliminated in favor of an energy only market
- Mitigating the distorting market effects of state-subsidized resources is at odds with consumer choice
- FERC should not mitigate the anti-competitive effects of state subsidy schemes such as "zero emissions credits" for certain nuclear plants because the federal government has not put a price on carbon.
Before addressing Mr. Hogan's assertions, it is important to set the table by describing the procedural status of the docket that prompted the letter from the executives.
In its June 29, 2018 order, which Mr. Hogan did not refute, FERC has already found — based on record evidence — that the existing PJM market rules are unjust and unreasonable under Section 206 of the Federal Power Act.
FERC determined that below-cost offers from state-subsidized resources undermine competitive market outcomes. This occurs both by substituting higher cost for lower cost resources and by artificially suppressing the price paid to the non-subsidized resources that do clear.
The evidence for FERC's finding included submissions from PJM as the independent grid operator and Dr. Joseph Bowring as PJM's independent market monitor.
Thus, by law, the current docket about which the IPP executives wrote is essentially the remedy phase.
FERC now has a legal duty to fashion the "replacement rate" that is just and reasonable to address the documented negative effects of state-subsidized resources. It must do so prior to the next annual capacity auction, which has already been delayed from this May to August.
Mr. Hogan argued for scrapping PJM's capacity market and replacing it with an energy only market. Aside from being outside the scope of the pending docket, the distinction between energy only and energy plus capacity markets is irrelevant to the challenge to either market construct posed by below cost offers from competitors armed with out of market subsidies.
The price signals that Mr. Hogan wishes consumers to receive and react to are distorted if not drowned out when a subset of competitors with higher actual costs can use billions of dollars of captive ratepayer money to displace truly lower cost competitors. This is the case whether the below cost offers are in an energy only market or in a capacity market.
For this reason, FERC will eventually have to address the distorting impact of state-subsidized resources on energy markets.
Mr. Hogan's second point was that somehow FERC doing its legal duty to mitigate the documented distortions from state-subsidized resources is at odds with customer choice. Anyone who has spent time in state capitals such as Trenton and Columbus testifying before legislatures, as I have done regularly, would find this at odds with the reality on the ground.
Far from supporting state subsidies, consumer interests — from state consumer advocates, to AARP, to industrial energy users — oppose the state subsidies muscled through by powerful monopoly utility interests. It is also why the Public Utilities Commission of Ohio filed comments in the pending docket arguing for a Minimum Offer Price Rule (MOPR) to protect a state like Ohio with a strong retail choice marketplace that has decided not to mandate state subsidies.
Third, Mr. Hogan argues that FERC should not do its legal duty to approve new PJM rules that mitigate the documented distorting effects of state-subsidized resources because PJM's market does not presently price carbon.
For starters, the initial complaint filed at FERC back in 2016 seeking a MOPR to protect PJM's markets from state subsidized resources was sparked by attempts in Ohio to subsidize coal. FERC relied in part on that complaint in fashioning its June 29 order finding that PJM's capacity market needs to be protected from state subsidized resources.
To be sure, the Illinois and New Jersey "zero emissions credits" (ZECs) for nuclear are among the state-subsidized resources that independent experts have said pose a threat to competitive market outcomes and thus would be impacted by a MOPR remedy in the pending FERC docket. If, as Mr. Hogan says, the problem is the lack of a price on carbon to reflect its cost, then the solution is to put a price on carbon based on carbon output.
That is not what ZECs do. Instead, as I heard with my own ears in open court, the Illinois attorney general's counsel admitted repeatedly that the state just did not like the least cost outcome of FERC-jurisdictional PJM capacity auctions.
PSEG's CEO said the same when I attended legislative hearings in Trenton, claiming that ZECs would be a stop gap revenue measure to augment market revenues until its plants could otherwise obtain higher prices and profits through FERC energy market reforms.
Climate change and its documented widespread negative impacts on our planet are too serious to become merely profit and dividend raising devices for the politically powerful.
PJM has offered proposals to give states within its footprint the option to put a price on carbon in a market neutral manner. Whether by federal, regional or state action, a price on carbon should be just that — a price on carbon emissions, uniform across fuels, non-discriminatory and transparent.
A ton of carbon avoided is a ton avoided regardless of source. Paying only chosen carbon free resources ignores the substantial reduction in carbon emissions from lower carbon resources and emerging technologies.
Well-functioning markets, both energy and capacity, and climate reduction go hand in hand, as the experience in recent years demonstrates. The new PJM generation about which the eight executives wrote FERC is a prime example because it is displacing higher emitting generation with less carbon emitting resources based on price signals at investor risk as FERC has long sought.
Failure to protect PJM's capacity market from state subsidies will make future investment on a competitive, merchant basis less likely.