The following is a contributed article by Liz Stanton, director and senior economist, and Joshua Castigliego, researcher, at Applied Economics Clinic.
A lot of ears perked when Federal Energy Commission Chair Richard Glick called out the "obsession" with increasing power plant revenues in the largest U.S. wholesale power market. It’s not every day the nation’s top energy regulator speaks quite so bluntly, urging an end to the focus on "bolstering uneconomic generation" in the 13-state PJM Interconnection region.
There has been attention before to the ways PJM’s annual market for electric "capacity" – power to meet future demand – overbuys and overpays generation owners. But prior analysis has typically focused on the total megawatts of excess capacity being procured. To get more specific is difficult, given that individual power plant costs are not publicly disclosed. Yet communities and state officials would be well-served with more detail. Which types of units are being paid even though their capacity is expensive and unnecessary? Are there implications for environmental justice communities given the plants’ locations?
To help provide some daylight, our research team used public data on power plants’ size, age, location, plant type and history of use to model the costs of existing and proposed coal and gas units in PJM’s market to buy capacity for 2021/22, which was held in 2018. We also mapped generators in relation to environmental justice communities using the definition of the Department of Environmental Protection in Pennsylvania, the state where PJM is headquartered. This means census tracts in which more than 20% of residents live at or below the federal poverty level, or where more than 30% are people of color.
Region-wide in PJM, we find that the majority of existing fossil fuel units are located directly in or within a mile of an environmental justice community. More than 80% are located within five miles. Zeroing in on just those existing and proposed coal and gas units benefitting from excess capacity procurement in the PJM market, what we term the PJM "fat market," we estimate that there are 77 uneconomic generating units receiving these excess payments. This is based on modeling plants’ capacity market offer prices and also estimating the market clearing price we might see in a more efficiently-run PJM market, one that’s not overbuying so much.
A third of the 77 units we estimate to be receiving fat market revenues in PJM are proposed gas units, which often rely partly on capacity payments to secure financing. Two-thirds are existing units on the grid today. Significantly, a substantial majority of these 77 "fat market" coal and gas units are located or planned within five miles of an environmental justice community, and nearly half are within a mile. We estimate that, region-wide, customers are paying $4.3 billion for the excess capacity.
At the state level, there are some notable takeaways. The large majority of the 77 fat market coal and gas units – 71% of them – are located in three PJM states: Pennsylvania, Ohio and New Jersey. Pennsylvania stands out for having by far the most proposed gas units receiving payments in PJM’s 2021/22 capacity market according to our model. Nearly three quarters of the 26 proposed gas units with fat market payments in PJM are located in Pennsylvania.
In Maryland, New Jersey, Ohio and Virginia, every single gas and coal unit benefitting from 2021/22 fat-market capacity payments in PJM is located within 5 miles of an environmental justice community. In Delaware, Illinois and Kentucky, every fat-market unit is within 1 mile of an environmental justice community.
FERC stepped in last month to reform one of the factors that leads to excessive capacity procurement at PJM, ending the 10% "adder" PJM has been tacking on top of its already high assumed costs for building new generation. Many other reforms are also needed, particularly revising PJM’s inflated forecasting for the amount of capacity it aims to purchase. It is certainly encouraging to see FERC delaying PJM’s next annual capacity market to enable time for additional reforms. It’s also good to see the Resource Adequacy Senior Task Force discussions afoot at PJM that are considering some 10 areas of reform.
Both nationwide and in the PJM region, low-income and Black families face the highest risk of death from power plants’ fine particulate emissions. As FERC Chair Glick did recently, it’s imperative to continue to draw attention to ways in which unnecessary and uneconomic fossil fuel generation is prolonged by market flaws. With our modeling in this analysis, we aim to contribute to wider awareness, and especially want to encourage greater involvement from PJM in this endeavor. It’s high time for real fixes to capacity markets that exacerbate inequity and consumer expense.