Expected Harm to Renewable Participation After FERC Order on PJM Capacity Auction Pricing

On December 19 , 2019, the Federal Energy Regulatory Commission (FERC) issued a highly anticipated order revising the capacity market run by PJM Interconnection, L.L.C. (PJM), the grid operator that administers the wholesale electric market across 13 states and the District of Columbia.

Citing the proliferation of state subsidized support for renewable resources and other programs subsidizing nuclear- and coal-fired generation, FERC radically expanded PJM’s Minimum Offer Price Rule (MOPR). With only three Commissioners currently, the two Republican Commissioners voted in favor of the order, while the lone Democratic Commissioner, Richard Glick, issued a vehement dissent.

Glick and various industry observers concluded that FERC’s order is expected to harm renewable generation seeking to participate in PJM’s capacity market.

MOPR Targets State-Subsidized Producers

FERC has been considering how to revise PJM’s capacity market for years. Under the capacity market structure, load-serving entities are required to participate in an auction to procure electric capacity three years in advance to ensure there is adequate generation to serve load. Since the prices for capacity are determined in a forward auction, PJM imposes a minimum offer price for new resources to ensure that the capacity market prices are not depressed below a competitive level, which would deter adequate investment in new generation.

Previously, the MOPR required that all new, non-exempt natural gas-fired generators offer at or above the offer price floor set by PJM. However, in its recent order, FERC found that gas-fired generation facilities are not the only resources with the ability to suppress capacity prices. FERC therefore extended the MOPR to apply to all resource types.

As a result, any renewable resource that receives a “State Subsidy” – and does not qualify for an exemption – will be required to offer at the minimum price.

Critics Assert Revision Creates Artificial Price Floor

FERC defined “State Subsidy” in extremely broad terms to include all renewable generation that receives support from a state renewable portfolio standard. Thus, in FERC’s view, renewable generators that sell renewable energy credits receive a State Subsidy, so they must abide by the MOPR if they seek to participate in PJM’s capacity market.

According to critics, expanding the MOPR in this manner creates an artificial price floor that does not reflect the actual (i.e., lower) marginal costs of renewable resources. Applying the MOPR to renewable generation will limit opportunities for those resources to earn revenue from the PJM market for the value of their capacity.

Existing Investments Exempt

FERC’s expanded MOPR did exempt renewable resources that have already cleared a capacity auction, executed an interconnection agreement as of the date of FERC’s order, or had an unexecuted interconnection agreement filed by PJM as of the date of FERC’s order. FERC explained that these exemptions were necessary to protect existing investments.

Renewable resources – like all other resources – can also receive a unit-specific exemption from the MOPR if the resource can demonstrate, based on its costs, that it would be competitive even in the absence of a State Subsidy. FERC’s order drew rapid criticism from renewable energy trade associations, state officials, and many market participants.

Further legal challenges are expected, which could take years to resolve.