Sunday, June 24, 2018

Doubts About Balancing Markets, State Policies in Diverse PJM

By Rich Heidorn Jr.

When PJM officials sought to prevent a repeat of the generation outages that nearly forced rolling blackouts in the winter of 2014, they quickly realized no solution was likely to clear a two-thirds sector-weighted vote — required to file proposals under Section 205 of the Federal Power Act.

As a result, the PJM Board of Managers filed its Capacity Performance rules unilaterally under FPA Section 206 after only a limited stakeholder review.

Winning approval of the RTO’s five sectors is difficult enough. Now, as PJM attempts to ensure the zero-emission credits approved for nuclear plants in Illinois — and similar measures under discussion in Ohio, New Jersey and Pennsylvania — don’t suppress prices, the needle may be even tougher to thread.

The RTO’s footprint includes D.C. and parts of 13 states — states with disparate energy and environmental policies, including both restructured and vertically integrated constructs. Maryland and Delaware are members of the Regional Greenhouse Gas Initiative (RGGI), a market-based program to reduce emissions.

In contrast, PJM members and coal producers West Virginia and Kentucky don’t even have renewable portfolio standards. (New Jersey appears likely to rejoin RGGI after Gov. Chris Christie, who pulled his state from the compact in 2011, leaves office in January. Both the Democrat and Republican candidates running to replace Christie have promised to rejoin.)

The differences in stakeholder views were displayed at FERC’s May 1-2 technical conference on state policies and wholesale markets, and they were also evident in post-conference comments filed at the end of June. (See PJM Stakeholders Offer Different Takes on Markets’ Viability.)

The commission asked commenters to weigh in on five potential “paths” of action (see table).

In their remarks, PJM officials told FERC they are pursuing three initiatives:

  • Allowing states to voluntarily join a system incorporating carbon pricing with existing market structures. This approach, which would require a “critical mass” of states to agree on a “common template,” is in the “beginning stage,” CEO Andy Ott told the commission.
  • A two-phase capacity auction that would allow subsidized resources to be counted as available reserves without influencing the clearing price.
  • Changes to energy market rules to improve price formation, which PJM says could reduce the need for out-of-market actions by states. It would expand on the issues identified in FERC’s Notice of Proposed Rulemaking on the pricing of fast-start resources (RM17-3). (See FERC: Let Fast-Start Resources Set Prices.)

The RTO had outlined the proposals in a series of white papers, the last of which were released earlier last month. (See PJM Making Moves to Preserve Market Integrity.)

Ott (left) and Joe Bowring, Monitoring Analytics | © RTO Insider

PJM said the Path 2 “accommodate” route “is most in need of the earliest feasible commission guidance and ensuing market rule adjustments,” citing concern that price suppression from ZECs and other state generation subsidies could be “exported” from those states to other regions.

Craig Lathrop, PSEG | © RTO Insider

Supporters of Path 2 include FirstEnergy and Eastern Kentucky Power Cooperative, which filed jointly, and Public Service Enterprise Group, which is seeking financial support for its Salem and Hope Creek nuclear plants in New Jersey.

PSEG said it will not keep its nuclear plants in service if they are not “economically viable.” Company executives told analysts on an earnings call in April that the units will be cash-flow positive at least through 2019 but that the plants’ finances could worsen by 2020. FirstEnergy, which has been trying for years to win subsidies from Ohio for its merchant fossil fleet, has recently sought aid for its Davis-Besse nuclear plant.


Davis Besse Nuclear Power Plant

PJM’s Independent Market Monitor, which opposed the Illinois ZECs, said “it would be a mistake for ISO/RTOs to explicitly accommodate state-level subsidies” in their capacity market designs.

The Monitor criticized the focus on so-called “baseload” resources. “The concept of baseload resources is backward rather than forward looking. Baseload units are units that run for most hours of the year. But the term baseload is now frequently used to mean units that used to run a lot of hours based on old economics, that no longer run a lot of hours based on current economics, and that are seeking subsidies to make up the difference in revenues.”

It opposed Paths 1-3, calling for a combination of Paths 4 and 5.

Direct Energy also weighed in on the baseload issue.

“The commission must ensure that to the extent there is an alleged need to retain baseload units for fuel diversity — which … may inevitably lead back to integrated resource planning — there is demonstrable and verifiable proof that without this retention, the electric infrastructure is in jeopardy from a security perspective,” it said. “Consumers paid far more than they should have in the days when utilities and regulators chose winners and losers through [the] integrated resource planning period. The commission cannot allow the cost efficiency and choices afforded to consumers through competition to be eviscerated without good reason.”

Richard Mroz, NJ BPU (left) and Place | © RTO Insider

Andrew Place, vice chairman of the Pennsylvania Public Utility Commission, endorsed Path 4 as the “most prudent approach.” The PUC, however, declined to take a position, citing uncertainty over how legislators in Pennsylvania, Ohio and New Jersey will respond to potential nuclear closures.

The Maryland Public Service Commission also withheld judgment on PJM’s proposed two-stage capacity auction, saying “the scope and scale of the proposal are uncertain.”

In a joint filing, American Electric Power and Dayton Power and Light expressed doubts about the ability to value and integrate state policies into markets. “While a New York carbon policy might be reflected in a carbon adder integrated into the NYISO’s market design, where there is only one state policy to address, such integration would be much more challenging in PJM, where the geographic and political diversity of the covered states would make policy consensus difficult to achieve.”

The companies also said PJM’s proposed two-stage auction could introduce “perverse incentives,” encouraging deregulated units to offer into the first-round auction at zero in order to clear the auction and qualify for the likely higher prices in the second round.

Public power commenters pushed back hard on PJM’s plans.

Old Dominion Electric Cooperative said the PJM proposal is not just and reasonable and called on FERC to avoid the “volatility of reactionary rule changes.”

The American Public Power Association said “PJM’s approach would by its design over-procure capacity resources, further increasing costs to consumers.”

American Municipal Power said FERC should order a five-year transition from the current PJM capacity model to one in which only 20% of capacity is procured through the auction with the remaining 80% procured through bilateral contracts.

Duquesne Light took the opposite position, saying it opposes the expansion of bilateral contracting.

It also said the current 90-day notice for generation retirements should be increased to 210 days. “The current 90-day advance notice of retirement of a unit is inadequate to allow PJM, the market and market participants to study and implement contingency plans to account and properly plan for the loss of generation,” the company said. “Generation deactivations can create local reliability problems whereby the totality of impacts cannot be identified within the current 90-day time frame nor can potential solutions be constructed within that 90-day window.”

The PJM Industrial Customer Coalition said the RTO’s “Capacity Market Repricing Proposal” whitepaper is “worthy of” further discussion but said it is strongly opposed to state mechanisms to price environmental attributes.

AEP and Dayton said FERC should consider the impact of state policies on transmission planning, not just capacity and energy markets.

“State-subsidized renewable generation investments may only be feasible in specific locations that require additional transmission to assure delivery. Market efficiency transmission projects are based on price signals in the energy and capacity markets,” the companies said. “Artificially low price signals, for instance, may cause significant delays in the planning and construction of transmission projects that could provide more cost-effective solutions to addressing generation retirements.”

They also commented favorably on the idea of creating a separate capacity tranche for resources based on their “resilience,” such as on-site fuel supplies, ramping capabilities and ancillary reliability services.


There was no consensus on how quickly PJM should act. The RTO asked FERC to set a Dec. 1 deadline on RTOs/ISOs to file rule changes. (See PJM Stakeholders Offer Different Takes on Markets’ Viability.)

The Monitor agreed: “It is urgent that the identified issues be addressed.

“But it is not so urgent as to prevent a rational, forward looking and collaborative approach to addressing the issues that are faced by all,” it said. It noted that three-quarters of nuclear plants covered 100% of their going-forward costs in 2016.

The PJM ICC said there was “no need for rush to judgment.”

The New Jersey Board of Public Utilities said wholesale markets are limiting the diversity of its energy portfolio because they “may not adequately value all attributes.”

New Jersey, which gets about 45% of its power from nuclear units, will likely see that fall in 2019 — when Exelon’s Oyster Creek plant is slated for retirement — even if PSEG keeps its plants running.

The Chicago-based Environmental Law and Policy Center said it has “yet to see evidence that near-term action is needed.” It called for extending the deadline on the RTO’s Capacity Construct/Public Policy Senior Task Force, which was created in January 2016. Its charter calls for it to complete its work by the end of the year.

“We are concerned about undue discrimination between resources, unreasonable costs imposed on consumers and interference with states’ environmental policies in order to address a ‘problem’ — low prices — that does not appear to actually be a problem,” the group said in a filing it made on behalf of the Natural Resources Defense Council’s Sustainable FERC Project. “These concerns are exacerbated by not allowing sufficient time and stakeholder process to carry out the work of the CCPPSTF or evaluate proposals addressing similar issues put forth outside of the CCPPSTF. There is no urgency to justify rushing the process, particularly where accelerating the process means key questions are going unanswered and result in poorly considered proposals.”

See also:

Public Power Skeptical of ISO-NE Two-Tier Capacity Auction

NYISO Sees ‘Productive Dialogue’ on Carbon Adder

We Read 79 FERC Comments So You Don’t Have to.