Dive Brief:

• PJM Interconnection next month will ask federal regulators to approve new capacity price formation rules aimed at allowing renewable resources subsidized by state policies to remain in the market without artificially lowering prices.
• The proposed "capacity repricing" approach would replace the current minimum offer price rule (MOPR) with a two-stage capacity auction. PJM staff will recommend its board file the proposal with the Federal Energy Regulatory Commission next month, but with an effective date after the May 2018 Base Residual Auction. 
• The decision from PJM staff excludes consideration of an alternative proposal from the PJM Independent Market Monitor that would expand the MOPR to include all resources. That proposal garnered more stakeholder support, but PJM CEO Andy Ott said capacity repricing would be "less punitive and less likely to frustrate the operation of state programs."

Dive Insight:

Wholesale energy markets are grappling with how to balance competition with state policy choices. ISO-New England earlier this month proposed similar changes to accommodate state-sponsored renewable resources through a two-stage Forward Capacity Auction (FCA).

PJM's proposed "repricing" scheme is similar to ISO-NE's two-part proposal: Each grid operator would hold an initial auction round that operates largely as it does today. A second phase would make adjustments to accommodate state subsidized resources, though the two market mechanisms would work differently.

​Not all subsidies will require repricing, but when necessary PJM said it will recalcuate prices after the first round by removing offers submitted by sellers with actionable subsidies from the price formation and settlement process. Those resources would be replaced with reference price offers, reflecting what would be a competitive offer.

"Although units with offers below the restated capacity price, but above what would have been the price in Stage 1, would appear infra-marginal, they would not receive a capacity commitment because they did not clear in the first stage," PJM explained in a white paper outlining the mechanism. The market would credit all cleared capacity market sellers from Stage 1 and charge all purchasing load serving entities based on the restated capacity price. 

Moving forward with capacity repricing means the PJM staff will not ask its board or FERC to consider the alternative expanded MOPR proposed by its market monitor, despite a scheduled vote on the plan set for Jan. 25.

In a Tuesday letter, Ott said the program, dubbed MOPR-Ex, may be more economically efficient than capacity repricing, but it could also disrupt state subsidy programs. 

"While MOPR-Ex would not prevent state programs from providing support to individual generators, it would most likely exclude generators obtaining this support from clearing the PJM Capacity Market," Ott wrote. "PJM believes this approach is not sustainable and does not strike an appropriate balance between legitimate state interests and wholesale market integrity."

Market Monitor Joseph Bowring disagreed, telling RTO Insider the grid operator does not need to "reflect state interests" when their policies "conflict with the operation of a competitive wholesale power market."

“PJM’s capacity repricing proposal would permit state subsidized resources to push competitively offered resources out of the capacity market," he told the outlet. "That outcome is inconsistent with competition.”

If approved by the PJM Board and FERC, a key process in PJM's repricing will be determining which subsidies require action. There the grid operator cautioned judgment will be required.

"The exercise of distinguishing actionable subsidies from non-actionable subsidies is one of judgment – guided more by practicality and less by pure principle," the white paper says. "Although identifying a subsidy as actionable under the proposal is not, as described, as consequential and problematic for the market seller as under MOPR, PJM would prefer to maximize the number of actual competitive offers on the supply curve and minimize repricing subsidized units with administratively-set reference price offers."

Repricing triggers "reflect a judgment on materiality," the grid operator said, "and recognition that the capacity market can tolerate, and has tolerated for a decade, some modest level of distortion." The repricing proposal is intended to operate by ignoring subsidies that have only a minor or theoretical impact on capacity price outcomes, PJM said.

In New England's proposal, the first auction would function largely is it does today but a second stage would include a voluntary substitution auction.

Existing resources that just retained supply obligations in the primary capacity auction and "are willing to permanently exit the market" can transfer their supply obligations to the sponsored resources in exchange for split revenues. The grid operator asked FERC to make the new Competitive Auctions with Sponsored Policy Resources rules become effective in March, to align with the year-long auction-administration cycle.​