PJM Plan Jeopardizes Clean Energy and States’ Rights

While the Trump administration’s threatened bailout of coal and nuclear plants gets a lot of attention for high costs, disruptive effects on power markets, and environmental harm, actions proposed by those actually in charge of the power grid could be just as damaging to America’s clean energy progress and cutting carbon pollution.

One proposal in particular poses a huge, looming risk to the rights of states to determine their own energy futures, and to the utility bills of 65 million people served by PJM, the nation’s largest electric grid operator stretching from Illinois to New Jersey and down to North Carolina. There are less than three weeks left for the public to weigh in against PJM’s proposal to prop up uncompetitive coal and gas plants in ways that would undermine state climate action and significantly increase consumer prices.

Background

The Federal Energy Regulatory Commission (FERC), which regulates PJM, recently ordered the grid operator to change the design of its electricity “capacity” market. PJM’s capacity market is like an insurance pool for power, in which power plants are paid to be available to meet predicted energy demand three years in the future, even if the electricity from the plants isn’t ultimately used. PJM submitted its proposed changes to FERC earlier this month.

PJM’s capacity market takes the form of an annual auction where power plant owners who supply electricity tell PJM the price they could most cheaply supply service to customers. Even though capacity market prices already are high, with total customer charges of $7.7 billion last year, PJM doesn’t think they are high enough. As PJM sees it, states undermine the purity of PJM’s power markets and depress prices by subsidizing some resources for their environmentally desirable attributes, like carbon-free power. These policies can include renewable energy standards requiring a specific portion of electricity to be generated from renewable resources or credit systems often used to reach a renewable energy target or value nuclear power’s avoided carbon emissions. Rather than recognizing the resources’ value to the overall power grid and “accommodating” these cleaner resources in its market as instructed by FERC, PJM proposed “solution” would punish them, increasing customer costs and discouraging states from continuing to pursue their clean energy visions. (And to be clear, PJM has offered zero evidence that subsidies meaningfully depress prices.)

States unquestionably have the legal right to make their own resource choices, and many are doing so now to slow the dangerous acceleration of climate change detailed in the recent report from the Intergovernmental Panel on Climate Change. Plus, nearly all power supply resources benefit from subsidies of one form or another; PJM’s targeting of subsidies that nearly exclusively affect cleaner resources is clear discrimination that will inevitably undermine states’ efforts to beat global warming. In an immediate example, PJM’s proposal could threaten recent progress to develop the rich Mid-Atlantic offshore wind resources.

PJM’s Proposal

To limit what it views as the price-depressing effects of subsidies on cleaner energy, PJM would require subsidized resources to increase their offer bids into the capacity market to a price that reflects their operating costs, exclusive of any subsidies.  The higher offer price is supposed to cancel out any revenue the supplier receives from the state policy, but increasing the offer price could put the clean energy resource “out of the money” in the capacity market. Unfortunately, FERC supports forcing higher offer prices, which we strenuously oppose. However, FERC is concerned about the effects of PJM’s plan to not count any resource that fails to clear the capacity market towards the region’s power supply needs.

Excluding cleaner resources from the capacity market would hurt consumers and the environment. Near-term, consumers will pay for unnecessary fossil fuel energy in the capacity market to fill the gap left by excluded clean energy resources, even though the clean energy resources will continue to operate and provide valuable energy to consumers. Long-term, excluding the clean energy resources could discourage states from strengthening their policies to fight global warming and cut pollution, and instead will drive more investment to fossil resources.

PJM did offer a fig leaf to allow state-incentivized resources to contribute to PJM’s overall capacity needs while excluding the fossil fuel resources that don’t clear the auction. But that “solution” would also increase capacity market prices for everyone. Analysis by the Independent Market Monitor found that capacity costs would nearly double in a single year, from $9.3 billion to $17.7 billion. This near-doubling of costs would occur even assuming less than 15 percent of the total market resources would be affected by PJM’s plan.

Adding insult to injury, PJM would require the state-incentivized resources to pay a consolation prize to the fossil resources that don’t produce electricity cheaply enough to clear the capacity market. In other words, the clean energy suppliers themselves would be forced to subsidize fossil fuel resources that don’t clear the market. This unprecedented idea begs the question: why would renewable producers even want to participate in the market?  This element of PJM’s proposal is virtually guaranteed to discourage cleaner energy suppliers from bidding into the auction. And even if they do, those extra costs to pay unneeded fossil fuel plants will get passed along to customers. 

That consequence reveals the poor logic of PJM’s proposal. If already-built clean energy is removed from the capacity market, utilities will once again be forced into buying extra electricity. Customers will pay even higher bills to purchase excess electricity, and the environmental benefits of the clean energy would be negated by the polluting plants the capacity market pays to stay in business. And in the long run, this will discourage states from adopting clean energy policies. Why would states support cleaner resources they knew would literally have to then pay support to more expensive fossil fuel resources?

The need for urgency

The public only has until November 6 to weigh in on PJM’s proposal to drastically change the design of its capacity market. The good news is that when FERC asked for proposals to redesign PJM’s capacity market, it didn’t just ask PJM. As NRDC’s Miles Farmer recently noted, it is possible to design a system that satisfies FERC’s desire to harmonize state policies with PJM’s capacity market. NRDC joined a group of clean energy and consumer advocates to suggest a path forward. It’s a solution that sets a fair, and legal, market price while preserving clean energy and protecting customers from unnecessary costs—no bailouts needed.