PJM recasts capacity repricing in market reform filing at FERC
- The PJM Interconnection on Tuesday filed a pair of options to reform its capacity market with the Federal Energy Regulatory Commission (FERC), recasting a capacity repricing plan that the agency threw out when it invalidated the grid operator's market rules in June.
- 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 for the remaining resources, combating what PJM says would be price-suppressive effects of removing subsidized resources from the market.
- Comments from renewable energy and nuclear advocates urged FERC to protect states' ability to meet clean energy goals, while fossil generators largely advocated for a strong price floor, though one floated a price on carbon. Reply comments are due Nov. 6 and a FERC decision is expected early next year.
The rewrite of PJM's capacity market rules will determine which generation resources are sited and retained in the nation's largest voluntary wholesale power market.
The proceeding is the product of years of debate in the Mid-Atlantic market and others about how to treat state-subsidized resources.
Gas and coal generators argue that state policies benefiting other resources — like renewable energy mandates or nuclear subsidies — lower the capacity market clearing price for fossil fuel plants, unfairly decreasing their revenues.
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's decision sided with the generators, finding the state policies improperly altered market prices. However, the commission also rejected both of PJM's proposed solutions, ordering it to design new market rules that would allow subsidized resources to opt out of the capacity market altogether.
PJM's new proposal offers FERC two options. The first, dubbed the Resource Carve-Out (RCO), tracks the federal agency's recommendations closely.
Both plans would institute a strict Minimum Offer Price Rule (MOPR) to block low bids from subsidized resources. PJM would then allow the blocked resources to enter the RCO and obtain a capacity commitment without having to bid in the capacity auction.
The RCO would provide a legally acceptable option to mitigate the impact of subsidies on the market, PJM argued, but it also represents a "trade-off" for FERC. Because the subsidized resources would be granted capacity commitments without a bid, the price for the remaining commitments will be artificially low, and unsubsidized plants that would otherwise clear the market would be "crowded out" by the RCO resources.
To address that, PJM proposed a second plan, the Extended RCO, to raise prices for resources that remain in the market. Under that, PJM would recalculate capacity prices by removing carved-out resources from its supply stack, but still factoring in the market demand they serve.
With fewer resources in the market serving the same amount of demand, the capacity price for remaining resources would be higher, allowing otherwise uneconomic plants to clear the auction.
The Extended RCO is a recasting of PJM's earlier Capacity Repricing plan that was rejected by FERC, said Rob Gramlich, a former advisor to ex-FERC Chair Pat Wood III.
"PJM has been transparent in stakeholder meetings that they were trying repricing again so it is not a surprise," he said via email.
PJM says Extended RCO is superior to its earlier plan because its calculation is simpler and it eliminates a "windfall" capacity payment to subsidized resources that FERC Commissioner Cheryl LaFleur critiqued in her dissent to the June decision.
Gramlich said the PJM proposal appears designed to address those concerns, but FERC will likely be skeptical of the new program.
"Calling it something different is clever but I doubt FERC will be fooled by the new name," he wrote.
Fossil generators are likely to support the program, as it includes their desired price floor and would boost their revenues. Clean energy advocates like Gramlich, however, say boosting capacity prices is not necessary in PJM — which has a 22% reserve margin — and will allow less efficient generation to stay on the system for longer.
"I think repricing and Extended RCO are simply means of raising the price to where PJM and certain stakeholders want it to be," he wrote. "It is not where supply meets demand, so it is inconsistent with decades of what courts and FERC have said is a just and reasonable market-based rate."
Not all generators went to bat for a strict price floor, however. Eastern Generation, which owns 3 GW of gas generation in PJM, asked FERC to direct the grid operator to integrate a price on carbon into its capacity market, as the New York ISO is doing. The lack of a carbon price, it said, "is a serious market inefficiency and creates significant and unproductive tensions with state policy initiatives."
How FERC responds to the PJM filing and others in the docket could determine the future of the market. On Tuesday, the head utility regulator in Illinois — a state with robust nuclear subsidies — warned that states could "justifiably seek alternatives" to PJM if FERC does not allow states to support their desired power resources.
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