Why Illinois May Need to Ditch PJM’s Capacity Market to Reach 100% Clean Energy

Source: By Jeff St. John, Green Tech Media • Posted: Thursday, March 19, 2020

Since it was first introduced last year, Illinois’ Clean Energy Jobs Act (CEJA), the state’s proposed 100 percent renewable energy bill, has been built around an escape from grid operator PJM’s capacity market, the country’s largest.

If the idea made sense last year, it makes even more sense today, according to the Illinois Clean Jobs Coalition, the group behind CEJA. Since then, PJM’s capacity market has shifted from constituting a potential roadblock to becoming a very real one when it comes to meeting the state’s clean energy goals.

We’ve covered how the Republican majority on the Federal Energy Regulatory Commission has ordered PJM to overhaul its capacity market by applying a minimum offer price rule (MOPR) to a variety of state-subsidized resources. While the details are complex and still in development, their result would be to force administratively set minimum prices on future wind and solar resources, energy efficiency, demand response and nuclear power plants in PJM’s capacity market.

Most expert observers agree that that would effectively bar such clean energy resources from successfully bidding into PJM’s capacity market, to the benefit of gas- and coal-fired plants.

The effect wouldn’t only be allowing some fossil plants that might otherwise close or never be built to continue emitting carbon for years to come. It’s also expected to drive up capacity costs for the 65 million people served by PJM’s system, to the tune of hundreds of millions or even billions of dollars per year, according to various estimates.

The particular threat for Illinois

In a particularly potent threat for Illinois, FERC’s MOPR will also apply to carbon-emissions-free nuclear power plants, which now supply about 90 percent of the state’s electricity. Those nuclear plants are critical to CEJA’s goals of reaching 100 percent carbon-free energy by 2030 as well as undergirding grid reliability as it pushes its share of intermittent renewables steadily upward.

While PJM’s proposed minimum prices for nuclear power aren’t nearly as restrictive as those set for renewables, they could still prevent them from beating fossil fuels in PJM’s annual capacity auctions. That would leave the state unpaid for the capacity value of its baseload nuclear power — and paying hundreds of millions of dollars a year for unneeded capacity from fossil-fuel-fired plants in other states.

This dynamic is actually what started the FERC-PJM situation in the first place.

Illinois’ nuclear zero-emissions credit (ZEC) program, passed in 2016 to help support Exelon’s struggling Quad Cities and Clinton power plants, led Calpine and other power generators to file a complaint to FERC, attacking the ZEC as an unfair interference in PJM’s capacity market. That complaint led to FERC’s 2018 decision to overturn PJM’s capacity market rules — but with a far broader application of the MOPR than those power plant owners had asked for.

This impact of FERC’s MOPR order on Illinois’ nuclear fleet is spurring calls for Illinois to exit PJM’s capacity market altogether.

“We are very concerned about the FERC capacity construct decision,” said David Kolata, executive director of the Citizens Utility Board, the state’s utility consumer advocate and a backer of CEJA, in an interview this week. “The [effect] of that decision is to raise electricity bills in Illinois and really counteract what have been successful clean energy policies.”

“We think there’s an urgent need to pursue the [Fixed Resource Requirement rule] — to stay in PJM of course, but to take the capacity planning function in-house,” he added.

The Fixed Resource Requirement opt-out: How it works

Since 2007, PJM has allowed utilities to opt out of its capacity market under the “Fixed Resource Requirement” rule, or FRR, and secure their energy needs through bilateral contracts instead.

It’s been used only rarely by utilities, including AEP in Ohio, Indiana and Michigan, and Duke Energy in Indiana, largely because it’s a major five-year commitment to eschew the relatively low-cost capacity provided by PJM and secure resources independently.

But for Illinois, the FRR has become the key to escaping the negative consequences of FERC’s PJM order — if the state can pass legislation authorizing it, Kolata said.

Illinois differs significantly from states that have already set 100 percent clean energy goals such as Hawaii and New Mexico, which aren’t part of grid operator markets, or California and New York, which have their own grid operators.

Illinois is part of a competitive multistate market in which generators sell and utilities buy energy, with a clear line drawn between the two. That means Illinois can’t implement policies that would allow its two big incumbent utilities, Ameren and Exelon-owner ComEd, to provide the generation capacity on the market and represent their millions of customers as the buyer of that power.

At the same time, Illinois’ arrangement also creates roadblocks to utilities buying renewable energy under long-term power-purchase agreements (PPAs), which has been “one of the most useful tools in other states” seeking to boost clean energy, Andrew Barbeau, president of The Accelerate Group, a consulting firm advising the Clean Jobs Coalition, said in an interview last week.

In fact, it’s this regulatory conundrum that led Illinois in 2007 to create the Illinois Power Agency (IPA) as a public entity to serve as a buyer of renewable energy credits and then later PPAs for renewable energy projects, to meet the state’s renewable portfolio standard of 25 percent by 2025.

The Future Energy Jobs Act (FEJA), passed in 2016, expanded the state’s renewable energy policies and the role of the IPA in enabling them.

To understand the role IPA plans in Illinois’ power markets, it’s important to recall that those markets have separate measures of energy — how many kilowatt-hours of electricity are produced and consumed over a period of time — and capacity — measured in megawatts of generation or load reduction available at all times, to meet peak grid demand.

Today the IPA purchases roughly a quarter of the state’s energy supply through long-term power purchases, only for customers who are taking “default service” from their incumbent utility, rather than through a retail electricity provider in the state’s competitive market, Barbeau explained. It also purchases RECs to help meet the state’s RPS goals.

But under CEJA’s FRR provision, the IPA would take over capacity responsibility for the northern half of the state served by ComEd that’s part of PJM, he said.

Then, it would use a tiered procurement structure that prioritizes carbon-free capacity first, and only turns to fossil-fueled power plants after those clean resources are exhausted, to meet those needs, he said. (Ameren and Southern Illinois are part of grid operator MISO, and aren’t included in this arrangement.)

Building state control of capacity into renewable energy support

The precise language for this is still being negotiated in the legislature. But its result, if implemented as originally intended, will be to bring roughly 13,000 megawatts of carbon-free capacity — mostly nuclear, but also wind and solar power, demand response and energy efficiency — into a market that requires roughly 23,500 megawatts of capacity to meet its 15 percent reserve margins, Barbeau said.

That’s a lot less capacity than what northern Illinois is getting today under PJM, where reserve margins in its 2018 capacity auction — the last one held — rose to more than 22 percent.

In Illinois, where nuclear power provides an ample cushion, reserve margins are even higher, approaching 30 percent, he said. That over-procurement represents hundreds of millions of dollars of excess payments out of the roughly $1.8 billion in capacity costs assessed to Illinois ratepayers every year.

In contrast, with the IPA serving as a capacity buyer under an FRR, Illinois should be able to procure its carbon-free capacity at a reasonable price and reduce the pricing power of the fossil-fired generators competing to serve whatever portion remains, he said. It will also be able to provide capacity revenues to the increasing share of renewable energy needed to meet the state’s RPS goals while shrinking the remainder left for carbon-emitting resources.

In fact, these capacity payments are an integral part of CEJA’s structure for helping renewables thrive in Illinois in the absence of PPAs and other long-term energy contract opportunities, he emphasized. While the details are still in negotiation, the goal is to give the IPA the authority to “leverage the capacity procurement with the REC procurement [and] to give renewable developers similar certainty as a PPA structure.”

The idea, he said, is for the IPA to offer utility-scale renewable project developers the promise of long-term purchases of their energy at prices that will still fluctuate along with PJM’s wholesale energy market prices for the region, but not as widely, because they’re stiffened by the additional certainty provided by capacity and REC revenues.

“If you’re able to plan for all three, you can reflect the value of energy, capacity and RECs in one all-in price. The key thing here is allowing the state to better plan and integrate its capacity procurement with the other long-term planning it’s doing.”

SEIA and AWEA offer their own plan

For all of these reasons, CEJA backers had already decided last year that remaining in PJM’s capacity market was likely incompatible with reaching the bill’s 100 percent clean energy goals. But FERC’s MOPR order has only accelerated that push, by threatening to completely undermine the state’s clean energy goals.

Not all clean energy supporters agree that CEJA’s approach is the best one, however. An alternative bill backed by renewable energy groups Solar Energy Industries Association (SEIA) and the American Wind Energy Association (AWEA), dubbed the Path to 100, would focus on increasing the 2 percent cap on the monthly renewable energy charges paid by Illinois utility customers to fund renewable energy and avoid the capacity market changes that CEJA proposed.

Supporters of the Path to 100 approach aren’t arguing that FERC’s ruling for PJM won’t harm renewables’ ability to earn money in the capacity market. Instead, the group has warned that it would be premature to make such major changes before opponents to FERC’s order have had a chance to challenge it via administrative requests for rehearing, and, if those are denied by FERC, via court challenges to its legality.

But the Illinois Clean Jobs Coalition warns that waiting for these remedies may not work out.

While more than 55 parties, including the attorneys general of 10 states, have demanded a rehearing of FERC’s order, it’s possible the agency will delay taking up those requests — a move that will forestall the legal challenges being promised by its opponents.

In the meantime, PJM is pushing ahead with efforts to comply with FERC’s order — most recently on Thursday, with plans on how to schedule the next auctions to take place under the new rules.

This auction proposal included a key detail that could influence Illinois lawmakers’ decision, Casey Roberts, staff attorney with the Sierra Club’s Environmental Law Program, said last week.

The impact of November’s election

PJM’s plan calls for holding its next auction six months after FERC’s pending approval of it, which could lead to an auction happening later this year.

But, PJM added, if any state files legislation before the end of May 2020 that requests additional time to effect a change from its current role in that capacity market — as Illinois’ CEJA does — PJM would ask FERC for permission to delay the next auction to “no later than March 31, 2021.”

That, of course, would be after the November election that may result in the Democratic party nominee defeating President Donald Trump or the Republican party losing its Senate majority to Democrats, or both.

Both changes could radically alter the course of action at FERC, creating the political conditions for its MOPR order to be undone through administrative or legal challenges.

So far, other states that are pursuing 100 percent clean energy plans within the construct of competitive energy markets, including Maryland and New Jersey, have yet to introduce legislation that would take the same kind of radical steps into self-managed capacity markets that Illinois’ CEJA is contemplating.

Whether or not they take action may depend on the results of November’s election, the Sierra Club’s Roberts noted. But if Illinois does finalize its own legislation by the end of May, the resulting delay of PJM’s next capacity auction could buy them more time — if that proposal is approved by FERC, which is another uncertainty, she said.