PJM's proposal to prevent state energy policies from affecting market prices is one of several high profile issues that could see advancement at the Federal Energy Regulatory Commission (FERC) with the Aug. 31 retirement of Commissioner Cheryl LaFleur.

But that policy could increase costs in PJM's $10 billion capacity market by $5.7 billion a year, according to a study released Wednesday by Michael Goggin and Rob Gramlich, vice president and founder, respectively, of consulting firm Grid Strategies.

The report is a way to account for FERC and Regional Transmission Operator (RTO) interference, Gramlich, former advisor to ex-Commissioner Pat Wood, said in an email to reporters. By attempting to remove the market influence of state subsidies, the price floor for capacity auctions would increase and lead to higher near term capacity price charges in customer bills. Grid Strategies' study says customers in the PJM area would pay on average $6 more on their monthly bills under PJM's proposal.

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"PJM's markets are currently facing a complex scenario where one state's policy choices are impacting other states that may not have the same policy view."

Susan Buehler

Spokesperson, PJM Interconnection

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The minimum offer price rule (MOPR) is a tool intended to mitigate the downward pressure put on the market by state actions in support of certain non-emitting resources, which can put other resources at a competitive disadvantage.

Four states within PJM have approved subsidies for nuclear and renewables. Fossil fuel generators within PJM, especially outside of those states, have argued that clean energy subsidies drive prices down in a way that unfairly block their resources from the largest single auction of electric power in the nation.

"PJM's markets are currently facing a complex scenario where one state's policy choices are impacting other states that may not have the same policy view. PJM has proposed to FERC a means to accommodate state policies while still ensuring fair market outcomes," Susan Buehler, PJM spokesperson, told Utility Dive. "We look forward to FERC addressing these issues on their merits."

However, clean energy advocates and several generators oppose the MOPR because they see the subsidies as necessary to reward the zero emissions attributes of their resources in the absence of wider carbon pricing.

The cost of clean energy outside of PJM's capacity market

Stakeholders expect FERC to approve some version of PJM's proposal. Under the MOPR, clean energy advocates and generators say PJM will award bids to generation that does not receive subsidies and therefore appears cheaper, while increasing the overall price floor in the capacity market.

Based on Grid Strategies' analysis, capacity market spending could increase 60% compared to current levels. States and zones with a large amount of capacity subject to the MOPR, such as New Jersey, Illinois, Ohio and Maryland will likely see even higher increases, according to the report.

"For example, capacity market prices in much of New Jersey and parts of neighboring states have historically been higher than in other PJM zones, and [the] MOPR would likely exacerbate that because the state has a large amount of existing nuclear capacity and future renewable capacity that benefits from state incentives," according to the report.

While many of the states' clean energy targets are set for 2030, Grid Strategies points out that a large amount of development is anticipated through 2023 in order to utilize existing renewable energy tax credits. Therefore, the next two auctions (for 2022-2023 and 2023-2024 capacity years) could be the most crucial for states to meet their more ambitious clean energy targets.

Getting to $5.7B

Grid Strategies arrived at the $5.7 billion figure by taking an estimate of the MOPR impact by PJM's Independent Market Monitor and multiplying it by all the capacity procured in PJM's 2018 capacity auction. The market monitor has "access to confidential information about the shape of the capacity supply curve and which resources have cleared the capacity market," making it likely that its estimate will be "more accurate than any estimate from an outside party," according to the report. Using this confidential data, the market monitor identified a $94.67/MW-day price increase across the entire RTO, in an analysis released last September.

Given that annual increase, federal data on residential electricity consumption determined that customer bills would increase by nearly $8/month in some cases as a result of the MOPR, according to Grid Strategies.

When asked about the projected cost increases from the Grid Strategies report, PJM maintained that its markets have driven savings for customers.

"PJM's competitive markets, operations and planning have delivered annual savings of $3.2 - 4 billion to consumers. They have also led to decreased emissions and a more efficient mix of resources that includes renewables, demand response and energy efficiency," Buehler said.

PJM did not mention the issue of propping up fossil fuel resources with the MOPR.

FERC's order to delay the capacity auction came within a week of new nuclear and coal subsidies being put in place by the Ohio. The newly approved subsidies would impact 2,096 MW of coal units and 2,116 MW of nuclear units accredited within PJM's capacity market, according to Grid Strategies. However, many of the subsidies currently in place impact nuclear and renewable resources.

Opposed to the MOPR? Can't count on FERC rehearing

Once FERC issues an order on the MOPR, PJM will be working to implement it. While groups can file for a rehearing, the process is likely to take a year, so the rehearing would not occur ahead of the capacity auctions expected next year, according to Exelon.

"PJM is going to need to proceed with the auctions in the interim," Mason Emnett, vice president of Competitive Market Policy at Exelon.

Therefore, the 2022-2023 and 2023-2024 capacity year auctions would reflect the MOPR extensions, meaning fewer clean energy options will be expected to clear the pricing price floor.

Many stakeholders, including Exelon, are expecting a FERC decision on the MOPR in early September, now that LaFleur is out of office. While LaFleur and her three fellow FERC commissioners passed a number of orders in 2019, with LaFleur often siding with Republican Commissioner Bernard McNamee and Chairman Neil Chatterjee, she told Utility Dive her dissents kept a number of items from being considered by the wider commission, such as natural gas pipeline projects.

When asked about timing and priorities with the PJM MOPR, FERC staff would not speculate.

"The Commission acts when it is ready," Craig Cano, FERC spokersperson, told Utility Dive in an email.

While stakeholders would be prudent to assume MOPR will be in effect during the next capacity market auctions, states can still act to limit the influence of the policy, such as Illinois.

The Illinois state legislature is considering a bill to shield customers from the bill increase attributed to these capacity payments. The Clean Energy Jobs Act would direct the Illinois Power Agency, which manages the power purchases of electric utilities in the state, to manage Illinois' own capacity market, an initiative supported by a consumer advocacy group in the state, Citizens Utility Board.

Who benefits from a capacity auction delay?

The auction for the 2022-2023 capacity year, initially scheduled for May 2019, was postponed by PJM on FERC's order.

Last week, PJM told stakeholders they are thinking about auction timing but options cannot be determined until they see what's in the upcoming FERC order, according to Emnett.

Speculation continues about how complex the FERC order will be to implement the MOPR within PJM. However, federal regulators have not issued guidance yet on how to deal with the delay.

The auction for the 2022-2023 capacity year could be mixed with the 2023-2024 capacity auction in May 2020. In the past, multiple auctions took place within a space of less than a year, according to ICF Executive Director Judah Rose. 

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"[There's] a lot of resource changes that can happen with one year delay in the auction."

George Katsigiannakis

VP of wholesale power markets, ICF

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"There are entities that are involved in negotiations, contracting, planning, and, everything else equal, they would like to have resolution quicker," Rose told Utility Dive. "The delay could make it more difficult for them to transact, if you will."

However, other parties may be enabled by the delay to participate in the next auction, he said. Such is the case for developers working on cleaner resource mixes or on new projects, like offshore wind. 

"The bigger the project, it is possible that they have more siting and permitting and/or structuring that they have to do and it takes more time to get their ducks in a row," Rose said.

Under the MOPR, renewable projects would be less likely to clear the auction's pricing floor without the subsidies. When it comes to resource options, clarity on how state subsidies are treated could create more time for generators within PJM "to improve their market position," according to George Katsigiannakis, VP of wholesale power markets at ICF.

"[There's] a lot of resource changes that can happen with one year delay in the auction," Katsigiannakis told Utility Dive.