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How FERC’s flawed definition of “subsidy” could reshape the energy future for 65 million Americans

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  • Jun 5, 2020

By Imelda Foley

The Federal Energy Regulatory Commission issued an order last December that could force many clean energy resources to bid into the nation’s largest wholesale electricity market, PJM, at artificially high prices. State policy makers, consumer and environmental advocates and the clean energy industry alike spoke out in vigorous opposition. Now, that order is being challenged in the courts. In the meantime, PJM must implement its directives in a process that will shape the future energy system for 65 million Americans in a region that spans 13 mid-Atlantic states and the District of Columbia.

While FERC’s December order was already bad policy — replacing competitive bidding with administrative pricing — many aspects of their mid-April order clarifying that policy are illogical and unworkable. As well as threatening competitive markets, these orders undermine state clean energy choices and, if FERC ignores PJM’s latest proposal attempting to soften the impact of the orders, could increase customer costs by billions.

The problem with FERC’s definition of ‘subsidy’

FERC’s orders aim to reshape PJM’s capacity market, which pays generators that commit, in advance, to provide power during times of peak electricity demand. Also known as the Minimum Offer Price Rule, these orders set minimum allowed bid prices for capacity resources that FERC deems recipients of “state subsidies,” on the grounds that the bids of these resources lower final auction prices.

How FERC’s flawed definition of “subsidy” could reshape the energy future for 65 million Americans
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This covers programs in many PJM states that have set aggressive clean energy targets. Renewable resources with minimal marginal costs (like wind and solar) have typically bid low, guaranteeing that they clear the auction. While FERC’s December order exempts some existing resources, the new price floors threaten to prevent new clean resources from clearing the market. Offshore wind and storage plants will almost certainly not clear.

FERC’s April order goes far beyond reversing the effects of state incentive programs, however. It expands the definition of “state subsidy” to cover certain types of normal commercial activity. If we take FERC’s vague and sweeping definition of “state subsidy” literally, it could require that MOPR price floors apply to all capacity market resources.

For example, in the April order, FERC declared that the auctions run by many states to procure power for utility customers confer a subsidy on the resources used to supply that service, even if (as is the case) those auctions are fully competitive and run without preference for any resource type.

This is not a minor matter; at least six PJM states hold these “default service” auctions, with several using them to acquire more than 60% of the power used by their retail customers.

This quickly leads down a rabbit hole: While the winning suppliers in these auctions use various mechanisms to acquire the power that ultimately serves homes and businesses in this region, these are all financial transactions and, as such, are settled in the PJM markets. For example, if a power supplier affiliated with a generation owner wins a contract for a tranche of 50 megawatts in a state auction, they don’t specify which of their diverse 2,000 MW portfolio is used to supply it. The generator sells into PJM’s market and the supplier pays PJM for the load used by the utility customers. Since it’s physically impossible to track an electron from its point of sale to its point of use, FERC’s broad definition of a ‘subsidy’ implies that all capacity resources clearing the energy market would be considered subsidized. While it’s hard to imagine this being implemented, it would mean that all capacity market bids would be set by administrative pricing. In taking this measure, FERC stepped far beyond all legitimate authority they have to regulate wholesale prices.

The road ahead

PJM has been forced into the position of attempting to fashion a treatment of state auctions that protects their ongoing activity while somehow still adhering to FERC’s orders. In its latest filing at FERC, EDF highlighted challenges like this and offered a practical process to bring certainty to FERC’s unwieldy state subsidy definition. It remains to be seen if FERC will step back from its state auction decision or continue to impose illogically broad policies and leave it to PJM and the states to pick up the pieces.

While EDF and clean energy advocates are working toward overturning the MOPR in the courts, PJM states with ambitious clean energy goals are under pressure to counteract the impact of the MOPR. This is of particular concern in New Jersey and Maryland, which have between them nearly 9 MW of planned offshore wind.

One option open to states is to require their utilities to withdraw from PJM’s capacity market. As EDF explained in its recent comments to the New Jersey Board of Public Utilities, however, this route is fraught. The withdrawing states would lose the efficiencies of a large central market, as well as PJM’s monitoring and enforcement of penalties for market manipulation.

The current MOPR conflict is a critical battle, but we shouldn’t allow it to serve as a distraction from our even larger goal: well-designed, competitive markets that lower customer prices, internalize the cost of carbon and other pollutants, and reward clean energy innovation. The first steps toward these goals are incremental improvements to the existing capacity market pursued through the stakeholder process at PJM. Over the longer term, a fundamental rethinking of wholesale markets is needed to prepare for high levels of variable renewables and the resources that support them, like energy storage and demand response.

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Richard Brooks's picture
Richard Brooks on Jun 7, 2020

FERC has provided past guidance: "a competitive market, where neither buyer nor seller has significant market power, it is rational to assume that the terms of their voluntary exchange are reasonable, and specifically to infer that the price is close to marginal cost, such that the seller makes only a normal return on its investment.” Tejas Power Corp. v. FERC (1990)", shining a bright light on a path forward to resolve these wholesale capacity market and State Energy goal tensions. Clean Energy Buyers (i.e. REBA and Level Ten members) have the solution that satisfies FERC's position and could work in wholesale markets; a capacity exchange that enables buyers and sellers of capacity to transact within a RTO/ISO operated wholesale capacity exchange that co-optimizes resource adequacy requirements for reliability while also meeting State Energy goals. It seems that many generators have placed all their capital, and hope, on "carbon pricing of wholesale electricity", which many politicians, e.g. those that want to be re-relected, and consumer groups oppose. There have been some attempts to find a wholesale market based capacity exchange solution following the lead of Green Buyers, e.g REBA and Level Ten, however, it appears there is no real interest in pursuing this path from regulators or industry stakeholders, at this time.




Bob Meinetz's picture
Bob Meinetz on Jun 8, 2020

Richard, what does "co-optimizing resource adequacy requirements for reliability" mean? Sounds like renewables mumbo-jumbo for "subsidizing" (at least, that's what FERC commissioners believed when they initiated the Minimum Order Price Rule).

It all seems to boil down to the fact it's impossible to guarantee reliability (future capacity) using unreliable sources of electricity. Yes, we all want to lower carbon emissions, but maybe suspending logic is not the best way to go about it.

Richard Brooks's picture
Richard Brooks on Jun 8, 2020

There are no State subsidies in the approach outlined. It's a 100% wholesale market solution that gives States what they want, while giving the Balancing Authority conttrol over the type of essentail grid services, using a fuel neutral approach, that will be needed for reliability given the type of capacity resources that will be on the system at time(t).

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Bob Meinetz on Jun 10, 2020

It sounds very much like loading order on CAISO, which requires renewable sources to be loaded first if they're available, then adds gas in real time to ensure reliability. If that's the case it's the antithesis of "fuel neutral" or a "100% wholesale market solution" - it's adding more renewable and gas capacity at whatever financial or environmental cost.

Richard Brooks's picture
Richard Brooks on Jun 11, 2020

I don't agree with the "whatever financial or environmental cost" part of the statement. In all cases, capacity acquisition should be on a lowest cost "uniform clearing price" for each purpose: resources to meet "State energy goals" and resources to meet a BA's reliability requirements.

Bob Meinetz's picture
Bob Meinetz on Jun 13, 2020

"...for each purpose: resources to meet "State energy goals" and resources to meet a BA's reliability requirements."

How states meet their environmental goals is outside of FERC's purview. By law, its jurisdiction is limited to interstate commerce, hydroelectric power safety and licensing, grid reliability, natural gas transmission, and market manipulation. The Commission has ruled PJM's capacity market is being manipulated by state subsidies, as well as increasing grid unreliability. It's instituted the MOPR as a corrective measure for both.

If it raises prices for consumers, maybe consumers should rethink trying to get a reliable supply of electricity from unreliable sources. That's the root of the problem.

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