FERC Issues Rules to Protect Ratepayers in PJM and New York Capacity Markets from Distortive State Subsidies and Mandates

The Federal Energy Regulatory Commission’s (FERC’s) rule to expand the Minimum Offer Price Rule, or MOPR, calls for the PJM regional transmission organization (which manages wholesale electricity markets covering all or part of 13 states and Washington, DC) to set minimum bids for state-subsidized electricity generators in its auctions. The FERC rule means that any fuel source competing in the capacity auction must bid in at a minimum price. The goal is to help remove the distorting effects of state subsidies and mandates for renewables, and begin to capture some of the implied costs of intermittency on the system as a whole. The MOPR only applies to state-subsidized resources; resources with federal subsidies are not subject to the MOPR. FERC’s price rule preserves U.S. energy security and seeks to restore competition to PJM Interconnection’s capacity market. The purpose of a capacity market is to ensure that customers have adequate generating capacity when required, not just when the power is generated. That is, a reliable and predictable reserve of electricity is essential when demand spikes or a power plant suddenly goes offline, which can happen during a winter polar vortex or a summer heatwave.

FERC also issued four orders affecting how the New York Independent System Operator can conduct auctions for electric generating capacity. One order guarantees that fossil fuel generating resources needed for short-term reliability and fossil fuel capacity resources with repowering agreements may bid at low price levels into the New York power market. The other three orders effectively raise the cost for renewables, demand response, and energy storage by imposing “Buyer-Side Mitigation” measures on those technologies when they compete in the capacity market.[1] Because those technologies are heavily subsidized in New York, it makes it difficult for traditional fossil fuel technologies to compete against them, tipping the scales in favor of non-dispatchable sources of electricity. These measures for the New York and PJM interconnects will assist in ensuring that power is available to residents 24/7 despite the weather or other issues.

Expanded Minimum Offer Price Rule

FERC’s rule requires that nearly all state-subsidized power resources hit a PJM-determined price floor to participate in PJM’s forward-looking capacity auctions. FERC’s rule will extend PJM’s MOPR—which currently applies to new natural gas-fired units—to include new and existing capacity auction resources of all fuel types, no matter the size, that receive or are entitled to receive “state subsidies.” The order only exempts specific resources from the rule, which include non-subsidized existing resources that have previously cleared auctions and non-gas “merchant” resources built without subsidies outside of PJM-operated markets. It begins to balance the scales of a system politicized in recent years to favor certain types of generation technologies with intrinsic reliability issues (intermittency) by ensuring their benefits of free fuel don’t overlook their built-in system costs owing to their inability to produce power upon demand.

Specifically, the following are exempt:

• Existing renewable resources that are participating in state renewable portfolio programs;
• Existing demand response, energy efficiency, and storage resources;
• Existing self-supply resources; and
• Competitive resources that do not receive state subsidies.

Issues Driving the Expanded MOPR

U.S. competitive power markets have been compromised by huge out-of-market payments. Subsidies for wind and solar power have eroded fair competition in the marketplace. Wind and solar are intermittent sources of electricity that are usually available only 20 to 40 percent of the time, but subsidies hide their true costs and create an incentive for them to generate electricity even when their power is not needed. These subsidies for renewable technologies have shuttered many baseload power plants in favor of less reliable sources that subsidies have made to look cheaper than they actually are. For example, many baseload units have been forced to retire prematurely.

A study by a team of economists from the University of Chicago found that solar panels and wind turbines make electricity significantly more expensive. They found that mandates, such as Renewable Portfolio Standards, significantly increase average retail electricity prices, with prices increasing by 11 percent (1.3 cents per kilowatt-hour) seven years after the policy’s passage into law and 17 percent (2 cents per kilowatt-hour) twelve years afterward. Seven years after passage, consumers in the 29 states with renewable mandates paid $125.2 billion more for electricity than they would have in the absence of the policy. The study compared electricity prices in states with and without a Renewable Portfolio Standard.

The problem is that most estimates of renewable costs fail to incorporate several key elements for renewables: 1) their unreliability, 2) their need for large amounts of land, and 3) their displacement of cheaper baseload sources like coal or natural gas. There is no cost added to renewable generators for their unreliability on the system, and subsidies and mandates have artificially driven them into the system while imposing hidden costs on consumers.

Conclusion

The underlying principles for the PJM and New York actions by FERC are to ensure that capacity markets provide accurate price signals to maintain adequate supply where and when the power is needed, and to meet the public need for electricity 24/7. Competitive markets should provide a level playing field for all resources and the FERC orders begin to ensure that. FERC’s rule means that any fuel source competing in the capacity auction must bid in at a minimum price, which will help remove the distorting effects of state subsidies and mandates for renewables. While far from a perfect fix, it does begin to recognize the market-distorting impact of the politicization of the electrical grid in the United States, hopefully before the costs to consumers accelerate even more due to state government actions.

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[1] Buyer-side mitigation refers to a potential minimum offer floor for new generation entrants to deter their subsidization, which could unduly depress capacity market prices.

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