The following is a contributed article by David Boyd, regulatory and policy strategist at AESL Consulting. He is a former VP of Government and Regulatory Affairs at MISO and a former Chair of the Minnesota Public Utilities Commission.
On December 19, 2019, the Federal Energy Regulatory Commission directed PJM to expand its current Minimum Offer Price Rule (MOPR) to address state-subsidized electric generation resources. This "strong MOPR" requires that specified, state-subsidized power resources be bid into the PJM capacity market at or above predetermined, technology-specific price floors.
FERC says it wants to make the capacity market a free and fair competition. States that want to decarbonize often adopt clean-energy subsidies to do so and worry that their customers will not receive credit for the capacity contributions of their resources and thus pay twice for capacity.
The question of how to respect both the national and state governments’ legitimate role in policymaking was the topic earlier this summer of Northwestern University’s Electricity Dialogue, "Can FERC’s Markets and State Clean Energy Policies Work Together?" I moderated a panel at this webinar and wrote a white paper by the same name.
Since the MOPR’s promulgation, those seeking to bypass the rule have paid considerable attention to the Fixed Resource Requirement (FRR). FRR would remove any utility (or state) that adopts it from using the FERC-regulated capacity auction to meet reliability needs for at least five years, under current market rules. Such an approach seems to force market participants backward by creating a less competitive procurement process — smaller in scale and thus more subject to big, local players. PJM’s independent market monitor has extensively reported on FRR and for Illinois, New Jersey, Maryland and Ohio alike — everywhere the market monitor has studied the issue — this could lead to higher overall costs for consumers.
As made clear from the discussion at the Electricity Dialogue, there are other alternatives to the MOPR available to states. One option is to put a price on carbon either directly through a tax or indirectly through a cap-and-trade mechanism. Carbon-pricing mechanisms have been discussed widely. A rich academic literature validates their efficiency — but only when they replace less-efficient, "redundant" policies like technology-specific Renewable Portfolio Standards (RPS). It does not seem politically likely that any state would "replace and repeal" their RPS.
Another alternative is to adopt some form of substitution auction exemplified by the relatively new Competitive Auctions with Subsidized Policy Resources (CASPR) in the New England ISO. This approach allows retiring resources that currently earn capacity supply obligations (CSOs) in the ISO’s Forward Capacity Auction the opportunity to transfer those obligations to new, subsidized resources that do not have CSOs. The existing resource would then retire, pay the subsidized resource for meeting the obligation, and keep the difference between the price of the CSO and the clearing price of the substitution auction.
This option ensures an orderly transition from older, higher-emitting resources to newer, cleaner ones. It’s a patch that makes capacity markets compatible with those state policies. But it is not yet a "market" in the sense of actively procuring what states are looking for.
Perhaps the best contender brings state RPS and Clean Energy Standard (CES) policies into the wholesale markets. That would involve making a broader pool of resources eligible to qualify for state targets, both technologically and locationally. One proposal for doing this is the Forward Clean Energy Market (FCEM) that has been proposed by the Brattle Group.
The FCEM is a competitively-bid mechanism that matches suppliers of clean energy attributes with willing bidders driven by state Renewable and/or Clean Energy Standards. Mechanically, the FCEM would look much like a forward capacity market where bids and asks are settled for a period three years forward. Those bidders with a compliance obligation under a state RPS or CES would participate on the demand side of the auction, while clean-energy resources would constitute the supply side. Thus, with both state and federal regulators in cooperative engagement, the FCEM could create the desired market-driven solution that fits the ideals of a competitive environment while respecting state authority, thereby solving the problems highlighted by the MOPR.
The MOPR has unleashed a panoply of ideas (some good, some bad) on how FERC and the states can use their respective regulatory tools to promote public policies, especially clean energy policies, without undermining competitive electricity markets. And as discussions like those at the Electricity Dialogue made clear, nothing is completely clear yet. More communication and cooperation among the key players is needed, and states should consider all alternatives — not just divorce.