FERC Must Preserve States’ Right to Affordable Clean Energy

NRDC and a coalition of clean energy and consumer advocates just joined stakeholders in the country’s largest electricity market, PJM, in submitting comments in a proceeding that will determine the future of state-supported clean energy across the 13-state region.

The Federal Energy Regulatory Commission (FERC) will review the comments with the intent of ordering changes to the PJM electricity capacity market by early January. FERC’s decision has the potential to successfully integrate state climate policies with wholesale power markets—or utterly frustrate state preferences and significantly increase consumer prices.

The comments submitted Tuesday represent the last round of stakeholder input in the redesign of PJM’s capacity market, which serves as a sort of insurance pool for electricity by paying power plants to be available to meet the predicted energy demand three years in the future.

Experts representing several commenters confirmed the frighteningly high costs (described in detail below) of PJM’s two-version proposal while also reinforcing the workability of several other proposals, including the plan put forth by NRDC and other clean energy and consumer advocates. As economist Jim Wilson wrote, the PJM proposal “has new features and new flaws, and would actually worsen the ‘disconnect’ that the Commission objected to in its June 29 Order.”

FERC’s June order found that PJM’s current capacity rules are not “just and reasonable”—a decision based on reasoning that we fervently oppose, but with implications we also recognize as an opportunity to create a more stable market for state and federal policies to coexist.

This opportunity arose because FERC also recognized that a new PJM capacity market design must not sabotage state climate policies that protect public health and wellbeing. The commission asked PJM, NRDC, and all other interested stakeholders to suggest designs for a capacity market opt-out for resources financially supported by these policies, which would allow electricity generation sources like wind and solar to thrive even under other changing rules in the capacity market.

FERC’s choices

As we noted in our comments this week, the proposal we submitted in early October details an opt-out solution that completely satisfies FERC’s guidance. Some other proposals, however, ignore key components of the FERC order altogether.

We propose a system that will balance administrative simplicity with benefits for customers and the climate. Low-carbon resources can opt out of the capacity market competition and the new rules that would make them uncompetitive. In turn, the total amount of capacity that must be procured is proportionally reduced by the amount of customer demand the power serves. We propose a flexible mechanism that allows resources to negotiate for compensation in advance of the capacity market’s annual auction so that everything runs smoothly. The lowest-cost energy sources are compensated for their sales, and only the amount of needed capacity is purchased. No price hikes, hidden fees, or un-earned revenues.

It’s also worth mentioning that NRDC is part of a broader coalition that—while each submitting their own more specific comments—has come together around a set of shared principles to meet FERC’s goal for state accommodation.

PJM, meanwhile, suggested two versions of its proposal, but FERC must review both with a critical eye. The biggest red flag with the PJM plan is the massive price increases that utility customers would face under the more onerous of the proposals.

The more innocuous version of the PJM proposal allows state-supported resources to opt out of the capacity market but doesn’t outline any clear way for them to earn compensation for the capacity obligations they fulfill. PJM says states will develop their own mechanisms, but the plan does nothing to create a transition period for state legislators and regulators to do so. And despite FERC’s explicit directive to protect customers from paying for duplicate energy, PJM’s design would still require customers to purchase more capacity than needed under the guise of reliability.

In the more insidious version, projected prices don’t just inflate, they skyrocket. According to economist Michael Schnitzer, the impacts are drastic everywhere, but particularly in the eastern part of PJM. For these customers, Schnitzer predicts that even if only 3,700 megawatts of resources opt out, which is only about 2 percent of the total capacity procured in PJM, the new system would result in a 100 percent increase in capacity costs—doubling what is already a large chunk of customer electricity bills in the eastern part of PJM. Economy-wide, the additional cost to PJM consumers would be $2.6 billion annually.

Rubbing salt in the wound, the design also imagines a consolation prize of sorts that would be paid to dirty generators only needed for capacity in a fictional scenario where the low-carbon energy sources opting out of the capacity market didn’t exist. But because the low-carbon energy resources are mandated by state policy, the dirty generators aren’t needed, therefore don’t actually provide capacity. What’s worse, PJM would have the state-subsidized energy sources pay this bailout to the dirty plants—a charge that would also be passed through to customers.

Some commenters—owners of fossil fuel power plants—go even further, rejecting FERC’s basic tenet of accommodation and arguing no new opt-out pathway is necessary. Without it, however, capacity market prices will increase drastically, and consumers almost certainly will pay for duplicate, unnecessary capacity.  

Other proposals include the Maryland Public Service Commission’s suggestion to create a second competitive auction among only the state supported resources. Others recommended a market-wide price on carbon emissions from power plants. While intriguing, pursuing these types of strategies would require further investigation and expansion of the stakeholder process.

As Justice Sotomayor declared in Hughes vs. Talen Energy Marketing—a 2016 Supreme Court case dealing with PJM’s markets—the Federal Power Act “envisions a federal-state relationship marked by interdependence.”   

Trampling on the right of states to determine generation mix within their borders to improve air quality and slow the impacts of climate change would undermine this interdependence—as well as hurt customers and undermine economic development across PJM.