Largest grid operator advances overhaul of FERC market rule

Source: By Jeffrey Tomich, E&E News reporter • Posted: Sunday, July 11, 2021

The operator of the bulk power grid across parts of the Mid-Atlantic and Midwest is proposing to revamp controversial market rules — a change that could empower states to reshape energy policies to address climate goals.

The updated rules by PJM Interconnection LLC were approved by the grid operator’s board yesterday and are expected to be filed with federal regulators by mid-month.

In the latest twist of a long, divisive battle over rules that govern the grid operator’s $4 billion capacity market, the proposal would effectively rein in use of the minimum offer price rule (MOPR), an artificially set price floor for electricity resources competing in PJM’s periodic auctions. The MOPR was expanded last year with approval by the Federal Energy Regulatory Commission under a Republican majority, drawing backlash from clean energy advocates who said the move would stifle renewables. A few states discussed exiting the capacity auction amid concerns that it would make it harder for them to reach their low-carbon goals (Energywire, June 1, 2020).

Changes to the MOPR in effect now were spurred by a 2019 FERC order that directed PJM to apply the price floor to renewable energy projects and nuclear plants supported by state subsidies. Previously, the price floor had been applied only to new natural gas units.

Democratic FERC Chairman Richard Glick was also a critic and suggested the commission would take action to reform the rule if PJM didn’t (Energywire, March 24).

PJM announced its intent to revise the MOPR in April, and market participants considered nine proposals during a fast-tracked process to come up with a solution.

“Here we sit, three months later, and the stakeholder body has tackled one of the most high-profile energy policy issues in the country,” said Asim Haque, PJM’s vice president of state and member services.

Haque said PJM’s proposal won the most support overall.

The plan would still apply a price floor, but differently than it does now, Adam Keech, PJM’s vice president of market design and economics, said in an interview.

Keech said the proposal accommodates both state policy and self-supply business models, addresses the issue of market power, and relies on supply and demand as the basis for clearing prices.

State-subsidized resources wouldn’t be subject to a price floor unless the subsidies come with added conditions. The proposal also differs from the MOPR as it existed prior to 2019 because new gas units likewise wouldn’t be subject to the rule except in specific circumstances.

“That style of MOPR that’s hyper-focused on a singular technology was too narrow,” Keech said. “What we look at today in the proposal is less about the type of technology being used and more about the intent of the action of the seller in the market.”

The revised MOPR would apply to resources that enter at deliberately lower prices to benefit the bidder’s overall portfolio. It would also apply to generators that receive state subsidies specifically conditioned on clearing the capacity auction — but it wouldn’t typically kick in under a range of other beneficial polices.

Jeff Dennis, general counsel and managing director of Advanced Energy Economy, a clean energy trade group, said the PJM proposal won strong support among various interests in PJM and, if approved, should help quiet the MOPR debate.

“It removes a clear barrier to participation by advanced energy technologies like wind, solar, and energy storage, and other technologies that states have been supporting through their policies,” Dennis said. “And it also allows us to move on to addressing some of the other issues that we need to see reformed in the PJM capacity markets to ensure that those resources can be fully integrated in future.”

Dennis, a former FERC staffer, said the proposal wouldn’t eliminate debate over state subsidies and the interplay with competitive markets. But it would make FERC the referee of those disputes and free up PJM to focus on other market design issues.

Not everyone thinks the proposed reforms are a step in the right direction for PJM’s capacity market.

Glen Thomas, executive director of the PJM Power Providers Group, a group of competitive generators including Calpine Corp., NRG Energy Inc. and Vistra Corp., said the proposal goes too far to water down MOPR and guard against the very market threats identified by PJM itself in 2018.

“This is effectively no MOPR, no protection against buyer-side market power or price distortion caused by subsidies,” Thomas said in an interview. “It’s bad law and bad policy, quite simply.”

PJM’s capacity auction is typically run every spring to help ensure utilities have enough generation available to meet demand in peak conditions. The auction is normally held three years in advance. Higher clearing prices tell the market that more generation is needed. Lower prices signal the least economic power plants to shut down.

The MOPR dispute led PJM to suspend auctions for three years while parties argued over a solution.

PJM won approval for a MOPR expansion to blunt the effect of state renewable and nuclear subsidies on capacity prices. But implementation of the new rule, which exempted most existing state-subsidized generators, muted its effect in the only capacity auction conducted under it.

Auction clearing prices tumbled by two-thirds across most of PJM’s 13-state footprint as a record level of renewable energy cleared the market and thousands of megawatts of coal-fired power was left out (Energywire, June 3).

“As the latest auction results demonstrate, the MOPR as currently designed has allowed the market to bring about low prices while integrating new, renewable resources and procuring reliable generation capacity,” Todd Snitchler, CEO of the Electric Power Supply Association, said in an emailed statement. “There is little need for a hasty re-design or to eliminate the MOPR.”

EPSA, a national trade association for competitive generators, preferred that PJM slow down the process. Rather than focus solely on the MOPR, the grid operator should also evaluate other market-related issues and seek to resolve them in a more holistic way, Snitchler said.

Thomas, meanwhile, questioned whether the MOPR proposal will erode confidence in the capacity market as a tool to ensure reliability. What’s more, he said, it could provide states with a “road map” to further subsidize politically favored resources, whether they’re renewable, nuclear or fossil fuels.

“What you ultimately worry about is a market structure where you as a generator are more motivated to go get a subsidy than to compete and win in the marketplace,” he said.