Electricity Markets

FERC order could hike PJM capacity costs by billions of dollars: report

The Federal Energy Regulatory Commission’s (FERC) Dec. 19 order revising the minimum offer price rule (MOPR) in the PJM Interconnection’s capacity construct could cost consumers billions or even tens of billions of dollars, according to a new report by Grid Strategies LLC.

Over the past several years, FERC has been considering changes to PJM’s capacity construct as a result of state actions to procure or retain specific types of generation, primarily  payments for zero carbon emission generation from nuclear power plants by states such as Ohio, Illinois, and New Jersey, but also the expanding procurement of off-shore wind and other renewable resources.

In June 2018, FERC rejected a proposal by PJM to address such state actions. FERC found that PJM’s solution was too narrow and had not adequately addressed the suppressive effect that “out-of-market” state programs have on capacity clearing prices.

At the time, the American Public Power Association and other public power entities argued that FERC’s decision could make PJM’s already flawed capacity construct “significantly worse.”

FERC’s Dec. 19, 2019 order directed PJM to expand its current MOPR to address state-subsidized electric generation resources, with certain exemptions. FERC said that the action reaffirms and builds on FERC’s June 29, 2018 order, which found that out-of-market payments provided, or required to be provided, by states in the PJM region to support operation of certain generation resources threaten the competitiveness of PJM’s capacity construct. That order found PJM’s open access transmission tariff to be unjust and unreasonable because the MOPR failed to address the price-distorting impact of resources receiving out-of-market support. This order also includes new resources constructed to meet public power self-supply within the expanded MOPR.

In response to the December order, the American Public Power Association, American Municipal Power and the Public Power Association of New Jersey said the decision

will expose public power utilities and their customers to the risk of having to pay twice for new capacity resources, without providing them any effective way to mitigate that risk.

December order a “major policy shift”

Calling FERC’s December order “a major policy shift,” Grid Strategies report authors Michael Goggin and Rob Gramlich also noted that the main mechanism previously proposed by FERC to accommodate state policy, the “Resource-Specific Fixed Resource Requirement,” which would have used bilateral capacity contracting for utility procurement of state-supported resources, was “terminated” with “little explanation” by the December order.

“In an unprecedented move, the new FERC policy also makes new utility self-supply subject to MOPR,” the report, A Moving Target, An Update on the Consumer Impacts of FERC Interference with State Policies in the PJM Region, stated.

The report also noted that a large part of the electric industry is made up of public- and consumer-owned utilities, and “the new policy targets their market segment in ways that will require fundamental changes to how they do business.”

Costs are still uncertain because bid floor determinations have not been finalized, but because public power utilities’ tax-exempt financing can lower the cost of generation, it is likely that bid levels would need to be adjusted higher to reflect the higher market cost of capital, which has the potential to raise capacity clearing prices even further, the authors said.

Over PJM and state objections, FERC’s new policy also applies to state energy and capacity procurements for customers that are not participating in retail choice, referred to as default service auctions.

While there are many versions of MOPR and much that is uncertain because FERC has yet to sign off on PJM’s new MOPR tariffs, “it is not possible to definitively conclude, as some have, that MOPR will have limited cost impacts,” the authors say. “Under most scenarios, MOPR will result in billions or tens of billions of dollars in excess costs to electricity consumers across PJM.”

The authors used two general scenarios to frame the possible cost effects of the MOPR – one with PJM’s 2018 proposed default bid levels and the other with the lower default bids in PJM’s recent compliance filing submitted in response to the 2019 MOPR order. If, for instance, nuclear plants clear the capacity auctions under the new rules, as would likely occur if FERC adopts PJM’s compliance filing’s default bids, and new renewable resources do not, the application of the MOPR could increase consumer capacity costs by nearly $10 billion total over its first nine years, or an average of over $1 billion per year.

On the other hand, if FERC adopts minimum bid levels that are closer to what PJM had initially proposed instead of those in PJM’s more recent filing, it is unlikely that subsidized nuclear units in Illinois, New Jersey, and Ohio would be able to clear the capacity market, the authors said. That would impose a much larger cost on consumers, particularly in the near term, reaching a total of almost $24 billion over the next nine years, averaging over $2.6 billion per year, the report found.

Capacity cost estimates could be lower relative to previous estimates, however, if FERC accepts lower nuclear and renewable bid levels than what was originally proposed and as a result of the 2019 order’s inclusion of resources that have signed Construction Service Agreements within the exempted existing renewable resources  These factors increase the amount of supply in the capacity market not subject to MOPR, likely resulting in lower consumer costs, the authors said.

The authors note that the analysis is likely to be conservative because it does not include the impact of applying the MOPR to self-supply, default service auctions, demand response, and energy efficiency resources. There is the potential that the new MOPR could remove a “significant amount of demand response and energy efficiency” from the capacity market, which could keep upward pressure on prices, the authors said.

The authors said their report was consistent with the results of other analyses. They cited an ICF report that estimated capacity prices would increase by $25 to $35/MW-day for the upcoming 2022-2023 capacity auction and $50 to $70/MW-day in the long term.

The “MOPR will impose significant costs on PJM consumers since reversing alleged ‘price suppression’ is the Commission’s explicit objective. These costs will only grow over time if states continue to pursue clean energy objectives and FERC does not change its MOPR policy,” the authors of the Grid Strategies report wrote.

The authors also noted that FERC’s current MOPR policy is “different than what was proposed by PJM and other parties, and includes significant changes from recent Commission positions.” That will give courts “plenty of material to review regarding whether these changes are arbitrary or capricious.”

The report is available here.