Dive Brief:

• The Federal Energy Regulatory Commission (FERC) issued a ruling on Thursday directing the PJM Interconnection not to conduct "a major feature" of its market, its capacity auction planned for August.
• The commission is working to incorporate aggregated distributed energy resources into the largest wholesale market in the country after a June 2018 order, which invalidated PJM's capacity market rules. In its ruling, FERC rejected a proposal from the grid operator to move forward with the anticipated auction.
• Running the auction next month "would raise serious questions about the legality of the auction and the resulting capacity commitments," Commissioner Rich Glick wrote in his concurring opinion, adding that PJM and its market participants have received undue "indecision and inaction" from FERC. The order does not clarify a timeline for future guidance, more than a year after a split FERC decision to invalidate PJM's capacity auction rules.

Dive Insight:

The controversy over PJM's capacity auction comes as another state approved subsidies for energy resources that are being pushed out of the market by more competitive, cheaper natural gas and renewable resources.

On Tuesday, Ohio Republican Gov. Mike DeWine signed into law a $1.1 billion subsidy for two nuclear plants in the northern region of the state. The legislation also gives nearly $50 million per year of subsidies to the Ohio Valley Electric Corp., which loses money selling power into the PJM wholesale market. OVEC operates two coal-fired power plants that generate a combined 2.3 GW.

Participants in the mid-Atlantic electricity market have long debated the impact of state energy policies, such as zero emissions subsidies which favor nuclear generators and renewable energy mandates. Gas and coal generators have argued that such policies allow the resources to bid into the capacity market at lower prices, therefore suppressing the clearing price for the market as a whole.

The annual capacity auction establishes how much generators get paid in three years based on the capacity they're putting on the grid. In 2018, the auction for power delivered in 2021/2022 cleared 2% less capacity than 2017 at nearly double the price, as nuclear capacity fell by more than a quarter after some plants did not win capacity contracts that year.

PJM sought to curb the impacts of the growing amount of state policies that seek to increase the competitiveness of either struggling power plants or new renewable resources.

Through the June 2018 order, FERC agreed with generators that state policies improperly altered market prices, directing PJM to devise a new market rule that would allow subsidized resources to opt out of the capacity market. PJM had previously proposed a minimum price floor and a two-part capacity auction separating subsidized resources, but FERC rejected those solutions, deeming them unjust and unreasonable.

Glick and Commissioner Cheryl LaFleur used the comments in the order to rehash their dissent of the June 2018 decision, questioning the rejection of PJM's proposed tariff without a path forward for remedying the situation.

"At the time, I called the June 2018 Order an act of regulatory hubris; however, given the passage of time, the uncertainty created by the Commission might better be labeled an act of regulatory malpractice," LaFleur wrote.

However, Commissioner Bernard McNamee pointed out, "[t]o suggest the Commission is the source of the problems presently facing PJM is to ignore nearly a decade of proceedings attempting to address the interaction between competitive markets and out-of-market subsidies."

FERC had previously approved a delay of the PJM capacity auction from May to August 14-28. In its latest ruling, FERC mentions the importance of sending price signals in advance to allow for resource investment decisions.

"[D]elaying the auction until the Commission establishes a replacement rate will provide greater certainty to the market than conducting the auction under the existing rules," FERC wrote.

PJM and its stakeholders previously urged FERC to provide certainty on capacity market rules ahead of the August auction.

"We will not rule prematurely on the issue of any appropriate remedy prior to rendering a determination on the merits of a replacement rate," the FERC order says.

The four commissioners unanimously concurred with the order. "We look forward to additional guidance from FERC on the design of PJM's capacity market," the grid operator said in a statement. FERC "recognized that confidence in the auction and its results is vitally important to all of our stakeholders and the integrity of the market."

Commissioners also addressed the lack of agreement among PJM's stakeholders regarding market signals from state policies.

"I think that PJM would be well-served by engaging with the states that regulate its member companies to ascertain their long-term commitment to the mandatory capacity market for resource adequacy," LaFleur wrote.

"The adaptation of the wholesale markets to all the state initiatives, that's far from resolved," LaFleur told Utility Dive in an interview on Thursday, calling PJM's situation "extremely contentious."

"That story will continue to play out after I leave and I will be very closely watching that," she said.