PJM aims for middle in defense of capacity market plan at FERC
PJM market participants presented wide-ranging criticism of a proposal from the grid operator to reform its capacity market rules in comments filed at the Federal Energy Regulatory Commission (FERC) this week.
Fossil fuel generators argued FERC should reject PJM's proposed market carve-out for state subsidized resources, writing that it would endanger competitive pricing in the remaining market. Consumer advocates, meanwhile, argued that PJM's plan to boost payments for remaining capacity market resources is unnecessarily costly and has already been rejected by FERC.
PJM wrote that its plan, meant to accommodate state preferences for clean energy, represents an acceptable compromise between the two camps. The grid operator was joined by nuclear generator Exelon, whose plant subsidies sparked the FERC effort to reform PJM's market rules.
The outcome of PJM's capacity market reform will shape which generation resources supply power in the nation's largest wholesale power market.
The proceeding is the product of years of debate over how to treat resources that receive subsidies or other non-market revenues from state action, like nuclear plants or renewable resources. Gas and coal generators argue these policies unfairly disadvantage their resources and threaten investment signals for new plants.
In response to those concerns, PJM in March proposed two capacity reform options at FERC — a price floor and a capacity repricing plan that would adjust market values for subsidies.
FERC affirmed concerns about state subsidies in a June decision, but rejected both of PJM's fixes. Instead, regulators directed the operator to design new rules that would allow subsidized resources to opt out of the capacity market altogether.
PJM responded in October, offering two options to FERC.
Under both proposals, PJM would remove state-subsidized resources from the capacity market and institute a strict price floor for resources that remain.
The second "extended" proposal would boost capacity prices of resources remaining in the market, combating what PJM says would be price-suppressive effects of removing subsidized resources.
Fossil generators endorse price floor
Many fossil generators say the market would be better off with neither flavor of the resource carve-out (RCO).
"Let's call [a carve out] what it is: a proposal to re-regulate a substantial portion of the competitive wholesale market," generator NRG Power Marketing wrote.
Generators argued FERC should abandon any sort of RCO and instead institute a strict price floor, dubbed a Minimum Offer Price Rule (MOPR), that would block lower bids from subsidized resources.
If FERC approves some sort of carve-out, it should only do so with PJM's extended RCO proposal, the Electric Power Supply Association (EPSA), a generator trade group, wrote in comments. That approach would "counteract some, but not all, of the [carve-out's] price suppressive effects."
If FERC does not approve the extended proposal or another alternative to raise capacity market prices, generators warned they may ask FERC for payouts to compensate for price suppression.
"If the Commission fails to take the necessary action in this proceeding to shore up the structure of PJM's capacity market, then the Commission must be prepared to develop mechanisms to provide stranded cost recovery for these investors who were otherwise tricked into investing capital in a market with no meaningful opportunity to recover that capital, and a fair return with it," generator Calpine wrote.
Consumer advocates cite costs
Consumer advocates took the opposite position, writing that FERC should accept the basic RCO, but not the extended proposal that would boost market prices.
"[Extended RCO] seeks to implement essentially the same Capacity Repricing proposal that the Commission rejected in the June 29 Order," a coalition of industrial consumer advocates argued. "Specifically, the Commission held that Capacity Repricing constituted ‘an unjust and unreasonable cost shift to [consumers]' ... The Extended RCO suffers the same fatal flaw."
State consumer advocates also criticized the Extended RCO proposal, arguing PJM has no need to inflate prices in a market that already has more power plants than necessary.
"PJM has roughly two-thirds more capacity than necessary to meet its reliability requirement; the largest excess of any [grid operator] in North America," state consumer advocates wrote. "Its own analysis shows that the peak load these capacity resources serve is expected to remain roughly constant for the foreseeable future … The record does not support moving forward with inflating capacity prices."
PJM aims for the middle
PJM's filing attempted to position the grid operator between both sides, arguing that its compromise is the only reasonable way to preserve capacity market functions while allowing states to support their desired resources.
"[S]ome parties, mostly from the merchant generator community, argue that an individual subsidized resource carve-out from the capacity market … will fail because it cannot guarantee that clearing prices for the resources remaining in the capacity market will be just and reasonable," PJM wrote. "On the other side … some parties, mostly representing [consumer] interests, dismiss or ignore price suppression concerns."
PJM criticized both arguments, saying the only way to ensure reasonable prices is to approve rules that "acknowledge, but limit, price suppression (such as PJM's Resource Carve-Out option) or rules that explicitly correct the price suppressive impact (such as PJM's Extended RCO proposal)."
If FERC rejects PJM's extended proposal, the grid operator wrote it would be open to a cap on the amount of capacity that can enter the RCO. That argument is where it split with Exelon, the nation's largest nuclear generator, which supports and would benefit from the RCO plan.
"[A] cap of 6 GW … is likely to result in massive oversubscription, to the point that it is likely to be essentially indistinguishable from a MOPR-only approach," Exelon wrote. "[T]he proposal has all the flaws of the MOPR-only approach — including double payment by customers — while failing to offer genuine accommodation to states."
Instead, Exelon pushed FERC to approve one of PJM's carve-out proposal without its extended price supports.
"It makes room for states to pursue energy policy initiatives favoring particular types of generation resources," Exelon wrote. "by allowing states to provide for the procurement of their capacity outside the PJM auction market— but credits load for that capacity, thus avoiding unnecessary costs for customers."
The comments filed this week were the second round of input in FERC's accelerated rulemaking proceeding on PJM's capacity market rules. FERC aims to make a decision early next year so rules can be in place for PJM's 2019 capacity market auction, which was delayed by the proceeding until August.
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