Next week, FERC will act on the much-ballyhooed Notice of Proposed Rulemaking (NOPR) issued a few months ago by Energy Secretary Rick Perry. The NOPR would provide out-of-market compensation, effectively a bailout, for coal and nuclear generators, mostly in the PJM region.

This brazen effort to help economically uncompetitive participants in the energy market place has been criticized by a remarkably diverse group of stakeholders that include not just renewable energy groups like the one I lead, but also the oil and gas industry, environmental organizations, and numerous states.  

Most observers expect that FERC will not issue the rule as proposed by the Department of Energy, but will shift to focus on a market-based approach. That would be welcome news, marking the beginning of a crucial next phase.

In looking ahead to that likely outcome, it’s imperative that FERC’s new approach not trade one uneconomical bailout for another. Right now, two significant market reform efforts are underway within PJM, the electrical region serving 65 million customers in the Mid-Atlantic to Great Lakes states that is the focus of the DOE proposal. These two reforms are intended to improve the economics for generation plant owners. Both would raise electricity prices for consumers and businesses – and do so without a clear basis in efficiency or reliability.  

The first proposal is called “capacity re-pricing,” which aims to adjust prices in the capacity market upwards to try to undo the potential price-reducing effect of certain state policies.

Crucial questions surrounding which of the myriad state incentives and subsidies could be subject to this treatment are now being debated, with no apparent driving economic policy principle underlying the effort. A central concern, in a nutshell, is that PJM might file this proposal without any exemption for popular state policies such as Renewable Portfolio Standards (RPS) — and FERC could quickly approve it.

In such a scenario, consumers in affected RPS states would then be forced to pay twice for capacity — once for the resources the state chooses, and another time for the additional resources that PJM and FERC designate. Effectively, ratepayers would pay for subsidized uneconomical generators, despite the reality that they aren’t providing the types of power that consumers and states want.

How a market mechanism may tilt the playing field

The second proposed reform goes to the energy market itself, where PJM proposes to allow inflexible units to set the price. That would raise the price in many times and places, typically by 2% to 5% according to PJM. During these higher-price hours, the old inflexible units will operate and be paid.

To avoid over-production, other more economical units would need to be paid to not produce. The result would be double payments in the major Mid-Atlantic power markets. The benefiting units are the same ones that received stranded cost payments with restructuring, and very high market prices in the years when gas prices were high.

It should be added that this does not suggest opposition to mechanisms that raise prices where circumstances warrant. For example, higher prices during times of scarcity (i.e., “shortage pricing”) can efficiently and appropriately compensate flexible sources such as storage and demand response resources.

The key point here is that, if ratepayers are going to be paying more, they should be getting something valuable in return, such as energy when it is scarce. This is the area where pricing reform should be focused if we are to ensure that consumers are getting more when paying more.

A better path for promoting resilience

Looking ahead, FERC should first focus on defining needed services for reliability and resilience. In doing so FERC can focus on technology-neutral markets to procure any needed services. In contrast, the alternative now under consideration appears to involve choosing a solution in the form of preferred technologies, and then looking for a problem it might solve.

If the PJM market were a residual spot market only, and market participants conducted most of their transactions bilaterally, as in most markets across the economy, then the market rules would be less vulnerable to stakeholder and policymaker political meddling. Capacity markets, which are a poor means of attracting the flexibility needed in today’s power systems, would become far less important.

FERC and RTOs should resist temptations to intervene in wholesale power markets. A better course is to allow states and customers to choose the power they want, and pursue only those changes needed to improve efficiency and reliability.