FERC seeks more input on PJM capacity market construct, possible reforms

Source: By Jasmin Melvin, S&P Global • Posted: Wednesday, April 7, 2021

Following up on discussions during a technical conference in March, the Federal Energy Regulatory Commission is seeking additional input on capacity market constructs as state policies are increasingly affecting resource entry and exit, including whether new market rules could be implemented in PJM Interconnection without delaying its December capacity auction.

Grid operators and stakeholders for the most part supported doing away with minimum offer price rules, as currently constructed and imposed on capacity markets in the Eastern regional transmission organizations, during a March 23 commissioner-led technical conference, the first in a series planned to help modernize electricity market design. Conversations focused on PJM’s expanded MOPR revealed mixed opinions as to what should follow, with participants offering a range of views on how the 13-state grid operator’s multi-billion-dollar capacity market can support states’ varying decarbonization strategies.

FERC in an April 5 notice (AD21-10) invited interested parties to submit post-technical conference comments by April 26, with reply comments due May 10.

While the notice said comments could be filed on any topic discussed at the technical conference, which also looked at ISO New England and New York Independent System Operator’s capacity markets, the commission specified 22 questions it would like answered on the implications of retaining PJM’s existing MOPR and prospective alternative approaches that could replace the current framework.

FERC, through the notice, asked commenters to reflect on the urgency in which they believe PJM’s capacity market rules must be reconciled with state policies. Among the questions was whether a phased approach should be adopted, and if so, should short-term actions include eliminating the expanded MOPR and replacing it with a targeted MOPR.

‘Negligible’ impact

S&P Global Platts Analytics maintains that the current MOPR’s impact on PJM’s upcoming capacity auction for the 2022-23 delivery year will be “negligible.”

“The amount of renewables subject to MOPR and thereby removed as price takers from the supply curve is not sufficient to materially impact clearing prices RTO-wide,” analyst Kieran Kemmerer said in an April 6 email. “Additionally, existing nuclear resources receiving subsidies and subject to a non-zero offer price floor [in Illinois and Ohio] have struggled to clear in recent auctions, and thereby an imposition of an offer price floor is unlikely to alter offer behavior or influence clearing prices relative to delivery year 2021-22.”

Kemmerer added that Platts Analytics is bearish in its outlook for RTO clearing prices, “driven primarily by updates to [PJM’s demand curve, or variable resource requirement,] and an influx of new gas-fired generation in western PJM.”

PJM’s capacity auctions were put on hold after a divided FERC in 2018 determined the grid operator’s capacity market rules were unjust and unreasonable because they failed to account for alleged price distortion caused by state-subsidized clean energy resources (EL16-49, EL18-178).

FERC subsequently directed PJM to expand its MOPR to set administrative price floors for all new and some existing resources seeking to bid into its capacity market that receive material state subsidies. PJM in February received final signoff on its compliance filings for implementing the expanded MOPR.

PJM is set to hold its first capacity auction since 2018 in May for the 2022-23 delivery year, followed by four-and-a-half month preauction schedules for the next commitment periods until the grid operator catches up to its three-year-forward schedule. Under that schedule, the auction for the 2023-24 delivery year is slated to be held in December.

FERC has been clear in various statements from commissioners and recent actions that it does not intend to do anything that may disrupt the May auction. But FERC in the notice asks for an explanation of “the timeframe in which a proposed replacement rate could be implemented to avoid delaying the December 2021 base residual auction.”

The notice seeks new and additional information on the benefits of the expanded MOPR, the impact the MOPR has on states’ willingness to remain in PJM’s capacity market, the type or quantity of state-supported resources that are unlikely to clear the capacity auction as a result of the MOPR, whether the MOPR will cause over-procurement of capacity and what impact that may have on PJM’s customers.

Potential alternatives

The commission, according to the notice, is also mulling whether other changes to the PJM tariff would be necessary if the expanded MOPR is revised or eliminated, and if it is “appropriate to combine those changes with reforms to ensure that capacity resources are properly accredited for their reliability value.”

FERC also asks if load-serving entities should be enabled to procure capacity outside of the capacity market, allowing PJM in turn to hold only a residual capacity auction to satisfy any remaining capacity requirements.

Other questions on alternative approaches include to which resources should a targeted MOPR apply, what exemptions should be considered and whether there are differences among the short-, intermediate- and long-term effects of removing the expanded MOPR on resource adequacy.

Additionally, the notice seeks input on the impact state-supported resources have on merchant resources’ ability to secure financing and FERC’s responsibility to states that are not subsidizing resources and instead are relying on the competitive market.