Understanding FERC’s Order Rejecting PJM’s Capacity Market Proposals and the Proposed Replacement Framework
By Jennifer Chen
Late last month, the Federal Energy Regulatory Commission (FERC), in a 3–2 decision, rejected two proposals filed by PJM as well as a proposal filed by a group of generators operating in PJM’s footprint about how PJM’s capacity market should handle state policies favoring certain types of power generation. FERC did, however, find that PJM’s existing capacity market rules related to sellers’ minimum offers are unjust and unreasonable and outlined a framework for a replacement rule.
PJM, states, and other stakeholders now have the opportunity to comment on and shape FERC’s proposed replacement rule. Initial comments are due within 60 days and reply comments are due within 90 days of the June 29 FERC order. FERC rules also provide that parties seeking rehearing (to contest a final decision) or clarification can do so within 30 days
PJM is soliciting input from its stakeholders for PJM’s initial filing to FERC. Comments to inform PJM’s filing may be sent to Suzanne.Daugherty@pjm.com and David.Anders@pjm.com by July 27, and these will be posted on PJM.com. PJM is also taking feedback during meetings on August 2 and 15.
FERC’s June 29 order rejected both of PJM’s proposals and established a framework for a replacement rule. Resource offers (or bids into the market) that are deemed subsidized would be subject to an expanded Minimum Offer Price Rule (MOPR) with few or no exceptions, which would bump up these offers to a price deemed competitive. A higher offer could result in a “MOPRed” resource not winning a commitment and earning revenue from PJM’s capacity market. Because a MOPRed resource can still provide capacity even if it does not clear the market, FERC proposed that PJM would also have to expand the ability for utilities to purchase less from PJM’s capacity market when resources they procure are MOPRed. This ability to purchase less capacity exists in limited form today as the Fixed Resource Requirement (FRR) Alternative. FERC is proposing to expand that to a resource-specific FRR Alternative.
Highlights of Issues on Which FERC Is Soliticing Comments
Answers to the following questions from FERC will materially affect which policies are impacted by the new rule and how effective the new resource-specific FRR Alternative can be in avoiding double procurement of capacity.
Scope of the Subsidies Covered
As detailed in Commissioner Glick’s dissent, nearly all resources are subsidized on the state and federal levels, and vertically integrated utilities receive guaranteed cost recovery that insulate them from market pressures. Which subsidies the new rule affects would shape PJM’s generation mix and depend on the comments FERC receives regarding:
- The appropriate scope of policy support to be removed from PJM’s capacity market by the expanded MOPR, including potential federal subsidies; and
- Whether there is a distinction between payments for pollution-free attributes of types of resources and plant-specific subsidies (i.e., could payments to address externalities become an exemption from the MOPR?).
Capacity Performance Requirements
Capacity Performance requirements determine what capacity on the system is counted. Whether they apply to FRR resources would ultimately impact how much capacity customers must buy. For example, wind and solar resources receive less than 1% of PJM’s capacity market revenue as their participation in the capacity market is limited by Capacity Performance eligibility rules, but these resources likely provide more capacity to the system.
Today, FRR entities must satisfy Capacity Performance requirements, but they can choose to commit additional capacity in the subsequent delivery year for each megawatt of performance shortfall instead of paying the usual financial Capacity Performance penalty. Here, comments may consider addressing:
- Whether it is appropriate to charge Capacity Performance penalties to resources that are not receiving capacity payments through the capacity market; and
- Whether a different Capacity Performance construct is needed for resource-specific FRR units.
Locational requirements impact whether resources can elect the FRR mechanism. Resources physically external to PJM’s footprint (such as many renewable resources) are limited by their ability to “pseudotie” into PJM, enabling them to sell in PJM markets. Even within PJM, current FRR rules require a minimum amount of FRR resources to come from within the FRR load’s modeled locational delivery area (LDA).
- How limiting are pseudotie rules and PJM’s capacity import limits to resources located outside of PJM’s footprint wishing to participate as FRR? Would these rules need revisions to enable external policy-sponsored resources to be counted as capacity in PJM?
- How limiting are current FRR rules on resources located outside of modeled LDAs (but within PJM) in enabling load sponsoring resources to receive the benefit of the associated reduced capacity obligation?
Mechanism for FRR Election and Matching FRR Resources to Load
FERC’s order suggests that MOPRed resources would select the FRR Alternative, not states or load serving entities (LSEs). This raises the question of how MOPRed resources are matched to the load that sponsored them, so that the relevant customers see a corresponding decrease in their obligation to purchase from the capacity market. For example, cross-state renewable energy certificate programs may not have an obvious associated load. Also, FRR resources may serve multiple LSEs, such as in retail choice jurisdictions.
- Should sponsoring LSEs or states also be able to elect the resource-specific FRR Alternative?
- Who should identify the load that will be removed from the capacity market auction in connection with resource owners choosing the resource-specific FRR Alternative?
Subtracting an Appropriate Capacity Purchase Obligation
An appropriate amount of capacity obligation must be subtracted off the sponsoring load’s mandatory procurement, and there are incentives to err on the conservative side to take off too little and maintain a higher reserve margin. This could contribute to excess capacity on the system.
- How much capacity obligation (including reserve requirements) would be subtracted off as a result of FRR participation and who makes this determination? What changes need to be made to the capacity market demand curve?
Maintaining a Robust Marketplace
If the goal is to accommodate government policies, the new rules must allow MOPRed resources to timely become FRR resources with proportional load removed from the capacity market. The current FRR Alternative requires the entire LSE’s load to participate and stay in the program for at least 5 years, but it is rarely used. New rules must not be so burdensome that it stifles FRR participation.
Some commenters have raised the concern that the FRR Alternative will lead to market collapse. But a well designed market should not rely on a captive consumer base and need not necessarily shrink as a result of flexibility afforded to customers and suppliers wanting to leave the marketplace. Instead, such flexibility could help incentivize market reforms to better serve market participants and attract them to transact in the market.
Jennifer Chen is Senior Counsel, Federal Energy Policy at the Nicholas Institute for Environmental Policy Solutions’ Climate and Energy Program.