Electricity Markets

PJM files proposals at FERC to address state generation subsidies

The PJM Interconnection on April 9 filed with the Federal Energy Regulatory Commission two alternative approaches for addressing state subsidies of electric generators.

PJM has said that generation subsidies mask prices that otherwise would signal uneconomic resources to exit and suppress prices that otherwise would retain efficient resources.

In February, the PJM Board directed the regional transmission organization to file both proposals at FERC.

At the time, PJM President and CEO Andrew Ott said in a letter, “Deciding between these policy options requires a balancing of federal and state interests, raising questions of federalism and comity that have already presented themselves before the courts, including the U.S. Supreme Court. Accordingly, the Board concluded that this question should fall to the Commission as the federal policymaker.”

PJM said that for more than a year, its stakeholders have discussed how to address the growing issue of state public policy programs that promote state-specific environmental, social or political objectives through some form of subsidy for generation that participates in PJM’s wholesale electricity markets. In the filing, PJM states that it “recognizes that the MOPR-Ex proposal elicited substantially greater support in the stakeholder process than did PJM’s Capacity Repricing proposal.”

In its filing at FERC, PJM said that absent an appropriate federal response, if a state selectively subsidizes certain resources while still depending on the wholesale capacity market to meet its overall resource adequacy needs, that state’s actions impact “not only capacity resources excluded from the state out-of-market revenue program (that perversely end up funding some or all of the support offered their competitors),” but also other states that may not embrace the subsidizing state’s particular policy preference.

PJM said that if a “material fraction of resources price their capacity offers relying on their selective receipt of subsidies,” then:

  • Other sellers in PJM’s interstate market that do not receive subsidies will receive an artificially suppressed, unjust and unreasonable rate;
  • Competitive entry will face a significant added barrier;
  • New subsidies will be encouraged; and 
  • One state’s policy choices could contribute to a crowding out of other competitive resources and resulting policy choices on which other states rely.

PJM emphasized that its filing “does not seek any action by the Commission in preempting any state from making whatever policy choices it wishes.” Rather, “the sole issue is how PJM and the Commission can ensure that the market can address these actions by states in a manner that does not undermine the fundamental purpose of the wholesale market.”

The grid operator said that through the filing, it shows that “the time has come to fill a gap in the PJM tariff, which currently has no way to address the adverse impacts of certain state subsidies on the PJM capacity market’s ability to promote robust supply competition and send appropriate price signals.”

PJM said that an emerging trend in PJM is for owners of certain legacy assets to seek out-of-market support from states “to forestall retirement and defeat the design objective of PJM’s market, at the expense of their competitors and wholesale consumers.”

PJM said it recognizes that a state may have strongly held policy reasons for providing out-of-market support to specific in-state resources or resource types. “But regardless of the state’s specific policy motivation, retaining or compelling the entry of resources that the market does not regard as economic, suppresses prices for resources the market does regard as economic,” the grid operator said. “This in turn suppresses revenues for resources that depend on these prices to support their continued operation or their economic new entry.”

Eventually, unless these resources “too are given a subsidy or (if they are essential to preserving reliability) a Reliability Must Run arrangement, they will be crowded out,” PJM said.

“Finding the balance between the states’ pursuit of their policy goals, and the need to preserve just and reasonable wholesale prices that support the level of investment needed to meet resource adequacy requirements is the point of this filing.”

Details on alternatives

The filing also offers what the grid operator said is a sequenced approach for the Commission to consider two alternate (mutually exclusive) proposals “for ensuring PJM’s wholesale capacity market can maintain just and reasonable price signals notwithstanding the potentially significant distorting effect of state subsidies.”

The alternatives are labeled as “Option A” (Capacity Repricing) and “Option B” (MOPR-Ex).

PJM said that Option A, which is the grid operator’s recommended proposal, accommodates state subsidies in a way that avoids impacts on wholesale prices by repricing a subsidized offer after it has cleared at its subsidized level, so that all offers that clear are paid a competitive price.

Under the Capacity Repricing approach, the current Minimum Offer Price Rule (MOPR) would be eliminated, and a two-stage capacity auction process would be created to accommodate state subsidies without distorting market prices, PJM said.

The first stage of the auction under the Capacity Repricing proposal establishes which set of resources will receive a capacity commitment, and the second stage establishes the clearing price for such resources.

Capacity Repricing would allow a resource obtaining state support to clear in the first stage of the capacity auction and receive a capacity commitment from PJM based on its submitted offer without mitigation.

A subsidized offer that cleared the first stage would be repriced in the second stage to remove the effects of the subsidy, “resulting in a competitive price for all resources.” PJM is proposing a definition of capacity resources with such an “actionable subsidy,” to include only those subsidies connected to the construction, development, operation, or clearing of the resource in the auction. Subsidies excluded from this definition are industrial or local development programs, and federal tax credits and incentives. Excluded resources are self-supplied resources owned by municipal, cooperative and vertically integrated utilities and various smaller categories or resources. Unlike the current MOPR, actionable subsidies could potentially include those paid to all resource technology types, and would include existing resources.

The RTO said that Option B would mitigate the impacts of state subsidies on wholesale prices by repricing subsidized offers through extension of the current MOPR to cover all resource types, as well as existing and external resources. The MOPR would however apply only to those resources with actionable subsidies, determined in a similar manner to the definition proposed in PJM’s proposal. The expanded MOPR would therefore not apply to self-supplied resources.

According to PJM, MOPR-Ex potentially could result in subsidized units failing to receive a capacity commitment.

PJM said that both filed alternatives work to ensure that artificially low offers from subsidized resources will not suppress capacity market clearing prices. “The two approaches differ, however, on the basic question of whether a subsidized resource’s artificially low offer can be used to qualify it to receive a capacity commitment (as is the case with the Capacity Repricing proposal) or instead require such resources submit and clear a competitive offer in order to receive a capacity commitment (as is the case with the MOPR-Ex proposal).”

The PJM Board of Managers concluded that the choice between these two approaches “at its essence presents a federal policy question, i.e., should the PJM Region wholesale capacity markets accommodate state policy choices to promote and rely upon particular resources while still taking steps to maintain the integrity of the overall clearing price. If so, then Capacity Repricing provides a reasonable means to achieve that policy preference.  Conversely, if the Commission’s policy focuses more on mitigating the impact of state subsidies, then MOPR-Ex would ensure the market is protected from the suppressive effects of state-subsidized offers,” the RTO said in the filing.

PJM requested a FERC order by June 29 and an effective date for tariff changes in January 2019, which PJM said would allow sufficient time to implement the changes for the May 2019 annual capacity auction.

PJM also suggested a settlement judge process for any outstanding issues that FERC identifies.