Pennsylvania’s legal wrangling over RGGI creating PJM market uncertainty

Source: By Jared Anderson, S&P Global • Posted: Sunday, July 17, 2022

Legal actions impacting the integration of Pennsylvania into the Regional Greenhouse Gas Initiative have affected the ability of fossil-fueled power generators to include RGGI costs in their cost‐based offers in the PJM Interconnection energy market, creating uncertainty within the industry, PJM’s market monitor said July 14.

Pennsylvania joined RGGI July 1 which resulted in power generators being able to include RGGI costs in their cost‐based offers as per their approved fuel cost policies, Monitoring Analytics, PJM’s independent market monitor, said in a July 13 note to PJM market participants.

On July 8, the Commonwealth Court of Pennsylvania issued a preliminary injunction preventing Pennsylvania from implementing and enforcing the state’s carbon dioxide budget trading program, which is the basis for Pennsylvania’s membership in RGGI, according to the IMM’s note.

Then on July 11, Governor Tom Wolf’s administration appealed the injunction to the state Supreme Court, effectively lifting the injunction. “As a result, generators can include RGGI costs in their cost‐based offers per their approved Fuel Cost Policies beginning on July 13 for July 14 unless and until the injunction is reinstated, if it is,” the IMM said.

Market impacts

“The immediate issue is it’s creating uncertainty,” Joe Bowring, president of Monitoring Analytics, said in a July 14 phone call. “We could see the injunction reinstated in the next week or so,” he added.

The IMM has been putting out notices to PJM generators, so they know how to remain in compliance as Pennsylvania’s connection to RGGI oscillates with the court decisions.

The impacts on power generators’ energy market offers depend on the type of unit and prevailing RGGI auction clearing price, which has increased significantly in recent years.

“This only has an impact on generators that are offer-capped, which is a relatively infrequent occurrence,” Bill Dugan, director of optimization for wholesale services at Customized Energy Solutions, said in a July 14 email.

“The impact at current prices depends on unit type but based on data from the state of the market report, that could be $3.50/MWh to $5/MWh for combined cycle gas units and $8/MWh to $12/MWh for coal plants, depending on efficiency,” Dugan said.

“This could have some changes on the overall generation stack for coal, and makes gas somewhat more competitive relative to coal,” he said.

A $15/st RGGI price would constitute a $12.95/MWh adder to a cost-based offer for a brand-new coal plant, according to the IMM’s first quarter 2022 state of the market report.

Additionally, if the price of carbon were $50/st, the short-run marginal costs would increase by $24.52/MWh for a new combustion turbine unit, $16.71/MWh for a new combined cycle unit and $43.15/MWh for a new coal plant, according to the report.

Pennsylvania joining RGGI would have a considerable impact on that market as well. The state would account for 41.6% of the carbon dioxide allowances offered for sale in the Sept. 7 auction, which is by far the largest of any state, according to a recent auction notice issued by RGGI.

The second largest quantities of 2022 allowances offered are from New York and Virginia, both at 14.3%.

However, should Pennsylvania ultimately remain in the RGGI carbon trading market, it will have no immediate impact on PJM’s next capacity auction scheduled for December, based on the existing rules.

“The problem with the capacity market is that generators must use historical net revenues in their bids and that would not include RGGI, but historical revenues are much lower than current forward power prices,” Bowring said.

“The short answer is the RGGI situation will not change capacity market offers because historical net revenues would not include RGGI costs,” he said.

And some market participants would prefer a broader carbon price rather than a patchwork state-level approach like RGGI.

“EPSA supports an economy-wide price on carbon to address questions around carbon emissions,” Todd Snitchler, president and CEO of the Electric Power Supply Association, which represents independent power producers, said in a July 13 email.

“Virtually all studies and analyses demonstrate that this would be the most efficient and cost-effective way to achieve emission reduction targets,” Snitchler said, adding that regional or state-by-state approaches are “therefore suboptimal and can result in undesirable outcomes like higher overall emissions.”