PJM on July 30 proposed to meaningfully revise the rules governing participation in its capacity market for at least the 7th time in 15 years. The previous revision undermined state climate and clean energy policies. This one seeks to accommodate those policies. Many incumbent generators, who benefited greatly from the prior change and who stand to lose out from this one, are, unsurprisingly, asking the Federal Energy Regulatory Commission (FERC) to reject PJM's proposal (and are fighting similar reforms in other RTOs). Their main arguments against reform rest on two bold mischaracterizations.

First, they depict the Minimum Offer Price Rule (MOPR) as an invariable feature of PJM's capacity market. They contend their investors have made decisions in "reasonable reliance" on the continuation of a MOPR that will protect them from entry by clean resources that receive payments from states. They argue they're entitled to a level of certainty surrounding the MOPR.

Second, they portray state climate and clean energy policies as just the opposite, as ever changing in size, target and form. They argue they can rely only on the status quo in making forward-looking investment decisions because there is too much uncertainty in these policies, creating risk for the market. They want the market to protect them from that uncertainty.

But, no reasonable investor would characterize the wholesale capacity market in this way. A few minutes of due diligence would clarify that the MOPR is an ever-changing, highly contentious policy tool, while state policies have been ratcheting steadily toward decarbonization for years .

Instability of the MOPR

PJM's most recent filing seeks to accommodate state policies unless FERC concludes that the policy at issue would be preempted. Some incumbent generators — generally fossil-fuel-fired — characterize this as a significant departure, suggesting that PJM has been on a steady march toward removing all state-supported resources from the market. They argue investors have made significant financial decisions in reliance on MOPR provisions and have a "reasonable expectation" that the MOPR will continue to protect against (alleged and unproven) price suppression from subsidized resources.

Regulatory certainty is a worthy goal. But, in a competitive market, generators aren't entitled to protection or guaranteed to recover their investment. FERC isn't obligated to provide regulatory certainty to any individual or class of competitors — there will always be risk in the market.

And, PJM's capacity market has been particularly susceptible to change. The history of the MOPR demonstrates that a reasonable investor shouldn't assume that (1) FERC's MOPR will stay the same for very long or (2) the MOPR will be used to provide full protection from competition from state-supported clean energy resources.

PJM's MOPR today looks very different from what it looked like in 2006 or 2011 or 2013. Exemptions for clean resources, state-supported resources, and self-supply resources have regularly changed over the years. The MOPR began with an exemption for all nuclear and hydro, and later included solar and wind. The MOPR initially did include an exemption for state-supported resources; PJM's proposal reaches a similar result by recognizing that receipt of state payments does not indicate buyer-side market power and should not subject resources to MOPR mitigation. The same fluidity has occurred in New England, where the grid operator has changed its MOPR faster than the courts can adjudicate.

The MOPR has been anything but static. It has been dynamic, changing frequently over the years in response to evolving state law, federal judicial decisions, and new technologies. The MOPR has regularly changed to carve out space for clean resources, regardless of whether they receive state support or not. A reasonable investor would understand this. It would be deeply unreasonable to assume that this part of the world stopped turning in 2019 and won't start up again anytime soon.

Climate-related transition risk In the energy market is certain

Furthermore, what should a reasonable investor understand about the future of climate policy? Many incumbent generators in PJM are arguing that state policies create significant uncertainty, undermining wholesale market operations and saddling investors with avoidable risks.  

But this once again gets things backwards. State climate and clean energy policies do not present regulatory uncertainty such that FERC's market rules must protect investors and developers. While it's true that state policies have evolved and will continue to change, state policies are generally clear when it comes to fossil-fuel generation (although there may be outliers). Climate policy is moving in one direction, and that is away from carbon-emitting generation.

As such, policy-related transition risk is known and it should be priced into the market. A reasonable investor expects the energy sector to face climate-related transition risk. FERC's markets should not mute signals from state policies, but rather transmit them without undue distortion. FERC can provide regulatory certainty and help investors by expressly recognizing that state policies are part of the legal landscape. FERC should reflect that continued state action is relatively certain—and far more certain than the MOPR's longevity.

In short, decarbonization and electrification are policy trends that are here to stay. Will policies change, maybe even significantly, in the future? Sure. But, investors that don't recognize the direction of state policy and the certainty of risk for fossil fuel investment are not reasonable.

Reasonable investors' expectations

So what's a reasonable investor to think about the MOPR and state climate and clean energy policies? If nothing else, it should be clear that one is more certain than the other. A reasonable investor knows the MOPR has not been a durable construct, while state policies have long been moving in one direction. There is certainty there. Regardless of what happens to the MOPR, states are not giving up on their climate ambitions. They will continue to support clean energy technologies that are cheaper for consumers and safer for their citizens.

Investor reliance on the imagined stability of the status quo in the energy sector is fundamentally unreasonable. The sector is changing. Ignoring that evolution cannot entitle market actors to protection. Investment decisions should not be insulated from the reality of climate and clean energy policy, which is here to stay. The reasonable investor understands this, and expects dynamic and innovative markets that will provide a cleaner and more sustainable future.