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What’s at stake for Illinois as FERC considers PJM capacity market changes

PHOTO BY Ryan McKnight / Flickr / Creative Commons

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The decision by federal energy regulators will affect how the state makes long-range plans for nuclear, renewable power.

An upcoming decision by federal energy regulators could give Illinois and other states greater autonomy to pursue clean energy, but observers say it also has potential to boost traditional power plants at the expense of ratepayers.

The Federal Energy Regulatory Commission is weighing multiple proposals for how the PJM regional grid operator should manage subsidized power sources from states such as Illinois that offer incentives for nuclear and renewables.

Here’s the background on what’s at stake, what’s happened so far and what could happen next as FERC prepares to make its decision:

PJM and the capacity market

PJM Interconnection manages the electric grid in 13 states (and Washington, D.C.), mostly in the eastern U.S., but also in northern Illinois’ ComEd territory. (Central and southern Illinois, covered by Ameren, are part of the MISO regional transmission organization.)

Regional transmission organizations oversee wholesale electricity markets. Individual customers and businesses purchase electricity from a supplier like ComEd, which in turn purchases electricity through PJM. Generators of all types bid to supply power in real-time and day-ahead markets as well as longer-range capacity markets, in which power providers bid their predicted prices to have power available three years in the future.

FERC is ruling on a question related to PJM’s capacity market.

‘An earthquake in the industry’

In recent years, many states, including Illinois, have begun offering subsidies to environmentally responsible power generators. These include zero-carbon credits for nuclear power plants and similar incentives for renewable generators.

This raised concern for natural gas generators, who argued that state subsidies allow the newer generators to bid into the capacity market at lower operating costs, potentially shutting out the traditional generators.

PJM, in an effort to allay those concerns, proposed changes to FERC last summer that supporters said would even the capacity market playing field.

FERC, however, thought differently, and not only rejected PJM’s proposed changes but went further, ruling that PJM’s current capacity market operations are unjust. With that, the federal agency ordered the organization’s administrators back to the drawing board.

“It was kind of an earthquake in the industry,” said Andrew Barbeau, president of the Accelerate Group, a renewable energy consulting firm.

The capacity market as of now favors traditional natural gas generators and power plants over renewables, Barbeau said. Through its ruling, FERC essentially told PJM to allow states more authority in their capacity market participation — a potential boon for states like Illinois that are trying to increase the use of renewables.

The pending decision

PJM returned to the federal agency in October with new proposed changes, while other parties — notably, the Natural Resources Defense Council and affiliated Sustainable FERC Project — brought their own proposal to FERC, which now has three main options to rule on:

PJM’s proposals

  • The first option is a minimum offer price rule, or MOPR. This rule would set minimum prices for certain subsidized power generators — those with subsidies deemed large enough by PJM to impact the market — to bid into the capacity market, ostensibly at the prices they would have bid in at had they not received subsidies.
  • The other option proposed by PJM is to allow states to take subsidized generators out of the capacity market altogether. States could opt for a capacity market “carve-out” in which subsidized generators count toward their capacity needs but don’t participate in auctions. Those generators also would not be paid for their capacity guarantees by PJM like they are now.

NRDC and Sustainable FERC’s proposal

  • This proposal is an alternative carve-out to the one proposed by PJM. States could exempt subsidized generators from participating in the capacity market, but unlike PJM’s proposal, those generators could seek other payments for capacity guarantees such as power purchase agreements with state agencies or utilities. States would obtain the remaining needed capacity through PJM’s capacity market.

Stakes for consumers and renewables

NRDC and other proponents of the alternative carve-out argue that PJM’s proposed changes will lead to a spike in consumers’ electric bills. The capacity market already obtains excess capacity, they say, and trying to compensate for state subsidies the way PJM proposes will only compound the issue.

PJM’s proposed changes will push renewables and other subsidized generators out of the capacity market altogether, Barbeau said. So customers will continue paying for excess capacity from traditional generators, while the state-incentivized renewable generators will be available to meet capacity demands but go unused.

Renewables “will be completely ignored” by the new capacity markets, Barbeau said. “And we’ll be continuing to send these payments to older fossil plants at sky-high prices.”

On the other hand, he said, if states can take over a portion of their capacity obligations in PJM — for example, through NRDC’s proposed partial carve-out — they’ll be able to buy renewable capacity at lower costs and only procure whatever is necessary through PJM’s capacity market.

And from there, the state could theoretically continue to obtain greater amounts of capacity from renewables. “We can go a lot further in terms of our state’s renewable and environmental goals — in putting Illinois on a path for 100 percent carbon-free energy, 100 percent renewable energy — wherever the state wants to put its foot in the ground with a new governor, a new General Assembly, to really live up to the promises they’ve made,” Barbeau said.

According to comments from PJM, the proposed changes do allow states to pursue their zero-emissions goals, but they also protect the larger regional market from experiencing any financial impacts. PJM argues that by increasing competition, its proposed changes will end up benefiting customers.

“In the short term, subsidies could drive prices down, but in the long term they will drive the more competitive (meaning less expensive) generators from the market and leave consumers with a less-efficient, more expensive generating fleet,” Jeffrey Shields, a PJM spokesperson, wrote in an email.

He added that the proposed changes would have minimal impact on existing renewable generators, since those facilities are often small enough to be exempt from rules like the MOPR.

What happens next

For now, PJM’s members are mostly waiting to see what FERC’s final decision will be. The commission was supposed to rule on the proposed PJM changes in early January. However, the death of a commissioner has left the group with four members instead of five, complicating and delaying the process.

At the minimum, their decision will expand the minimum-offer rule to include subsidized resources, said John Moore, director of the Sustainable FERC Project. If that’s the case, he added, states like Illinois will most likely “start looking very seriously at what they can do to extract themselves from at least the capacity market.” That would mean that the state and all of its generators, renewable and otherwise, would leave the capacity market, rather than just the subsidized ones.

“I think whatever we do will be in the direction of a process where renewable energy isn’t discriminated against,” Moore said. “What that looks like depends on what FERC does.”

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