Electricity Markets

PJM proposals would increase power prices, create risks: Association

The Federal Energy Regulatory Commission should reject two alternative approaches for addressing state subsidies of electric generators filed by the PJM Interconnection because they would create significant price increases with no discernible benefit and would continue to create risks for public power self-supply capability, the American Public Power Association said.

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 that the Association is protesting at FERC. PJM filed the proposals at FERC on April 9 (Docket Nos. ER18-1314-000 and ER18-1314-001).

The PJM filing offered 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.”

State subsidy programs of concern to PJM include Zero Emission Credit (ZEC) payments to existing nuclear generation, subsidies for off-shore wind generation (such as through dedicated Offshore Wind Renewable Energy Credits), and even long-standing renewable portfolio standards and associated renewable energy credits.

The grid operator proposed a capacity repricing proposal -- PJM’s preferred approach – and the alternative “MOPR-Ex” proposal.

PJM’s Capacity Repricing Proposal creates a two-stage auction. The first stage allows all resources to offer to sell capacity at any price they choose and would clear the resources and the quantity of capacity, but not set the price. The second stage would reprice the offers of all resources defined as receiving “actionable subsidies” and would determine the price to be paid to those resources that cleared in the first stage. All resource types could be subject to repricing, rather than the current Minimum Offer Price Rule’s limitation to just planned natural gas-fired resources.

Under the MOPR-Ex Proposal, as modified by PJM, the current auction methodology would be retained but with a significantly expanded MOPR that would apply to all planned and existing resources of all technology types with “actionable subsidies.” Exemptions from the MOPR would be given to Self-Supply, Competitive, Public Power, and Renewable Portfolio Standard resources.

In its May 7 protest of the proposals, the Association said that PJM has failed to demonstrate any threats to reliability that would justify such complex and costly rule changes. The Association noted that it continues to propose that a residual capacity market with procurement through bilateral contracting would provide greater benefits and achieve reliability, resilience, and other policy goals.

The Association made the following points in its filing:

  • PJM fails to adequately justify the proposed rule changes
  • The proposals represent an unjustified subsidy to merchant generation
  • Bilateral contracting or ownership should be supported, not merchant generation development
  • The proposals add complexity and cost without demonstrated benefits
  • The proposals were not supported by stakeholders

Merchant generation

The Association argues that both proposals would artificially inflate prices that are paid to merchant generation.

The trade association said that PJM attempts to justify the need to protect the prices paid to merchant generation by asserting that merchant resources are essential to ensuring sufficient capacity.

While PJM claims that approximately 75% of the total generation in PJM is now merchant generation, it does not provide any data to support that figure, the Association points out.

For a more careful examination of the data on new generation, the Association notes that it has conducted analyses each calendar year of new capacity developed nationwide and the financial arrangements supporting such capacity. The list of new capacity is primarily obtained from an Energy Information Administration table, and then research is conducted on each individual project to determine its financial arrangement. Resources are characterized as merchant if the owner or developer states that it was built for market sales, if it is not owned by a utility or a customer, or does not have a contract or purchased power agreement.

The Association’s filing included a table that shows the total capacity developed within the PJM footprint each year since 2013, and the percentage of the total that is merchant.

“This table shows that, while merchant generation has been a significant part of the capacity in PJM, other than last year, it has not played as essential a role as claimed by PJM. Moreover, the amount of merchant generation in each year is far below the amounts by which PJM’s capacity procurement exceeded the reserve margin. Had there been no merchant generation developed, PJM would still be above its reserve margin,” the Association said.

The Association said that PJM’s proposal, “while nominally accommodating state-supported resources, would promote new merchant entry, even though it is becoming increasingly evident that the merchant model itself has some inherent limitations.”

Developers of merchant plants, for example, do not undertake long-term planning to determine if the generation being developed represents an optimal mix of resources, the public power group pointed out. The new merchant generation within PJM has been almost entirely comprised of natural gas plants, and the reliance on a single fuel has become an increasing concern for PJM, the Association went on to say.

“Moreover, the financing of merchant plants tends to involve a higher cost of capital as a reflection of the greater risk involved in relying on markets rather than more stable sources of revenue such as bilateral contracts.”

Instead of supporting a “volatile and risky merchant model, PJM should seek to reform its resource adequacy construct to encourage more stable forms of procurement via bilateral contracting and ownership of resources by states, utilities and large customers.”

Problems with the Capacity Repricing Proposal

The Association said that while there are some well-intended aspects of the proposals, “there are many problems embodied in the design of each that would negate any positive aspects.”

For example, the Association said that the second stage of the Capacity Repricing Proposal’s auction would dramatically increase prices.

The Association said that another flaw in PJM’s proposal is the design of the two-stage auction. “Given the public knowledge of the existence of ZEC programs, any seller who determined that such nuclear resources would be subject to such repricing would rationally bid at zero in the first stage of the auction. Resources would have no reason to bid their actual costs if the expectation is that a repriced nuclear unit is setting the price. Indeed, they could bid at zero in the first stage for the sole purpose of clearing and receiving this extreme price at the repricing stage, and therefore would not be committing to operating at a loss, contrary to PJM’s assertion.”

Deficiencies of MOPR-Ex proposals

In addition, PJM’s modified MOPR-Ex would significantly raise prices through its expansion of the MOPR, the Association said.

It said that under MOPR-Ex, the MOPR would be applied to all resources with an actionable subsidy, as determined in the same manner as in PJM’s Repricing Proposal, and would include new and existing resources, all technologies and fuel types, and include external resources.

Proposals not supported by stakeholders

Meanwhile, the Association pointed out that both proposals were rejected by stakeholders. “PJM presents their Repricing Proposal as the primary option, even though it had less support than the MOPR-Ex, with a voting ratio of 1.07 in favor compared to 3.19 for MOPR-Ex. Moreover, the status quo option received greater support than both the PJM proposal and the MOPR-Ex in an earlier non-binding poll. Clearly, there is no sense of urgency among stakeholders to approve either proposal.”

Evidence of ongoing unsuitability of mandatory capacity markets

The Association said that PJM’s submission of the proposals is further evidence of the ongoing unsuitability of mandatory capacity markets to ensure resource adequacy.

“With this filing, PJM introduces yet another complex and costly set of market rule changes to its administrative RPM [reliability pricing model] construct. PJM’s filing in this docket is just the latest in a series of proposals that would materially revise the RPM rules without ever reaching a steady state that is acceptable to all parties, with additional changes forthcoming,” the public power group told FERC.

The Association urged FERC to reject the proposals and to request that PJM develop a proposal “that does not depend upon a mandatory capacity market, provides true price transparency about actual levels of supply and demand, protects consumers from excess prices, and allows for public power and states to determine their resource needs.”

AMP, IMEA also weigh in

American Municipal Power and the Illinois Municipal Electric Agency also weighed in on the PJM filing in separate comments.

IMEA “believes that both these proposals have significant unintended consequences, and is concerned that the potential impact of these consequences may largely undermine incentives for an efficient market outcome provided by the Capacity Performance construct,” it said in its May 7 filing at FERC.

For its part, AMP said that PJM has failed to demonstrate that the Capacity Repricing Proposal or the MOPR-Ex are just and reasonable “or even needed.”