FERC and PJM Should Not Bail Out Generators That Failed the “Elliott Test”
As the region faces changing weather and tighter reserve margins, it needs dependable energy supplies. Power plants that fail when needed should be held accountable.
Power generator members of PJM are asking the Federal Energy Regulatory Commission (FERC)—the independent agency that oversees the power grid—to forgive steep penalties for failing to deliver energy during Winter Storm Elliott back in December. Those same unreliable power plants are pushing PJM to reduce their accountability if they fail again next winter.
For the sake of grid reliability, FERC and PJM must say no. They should hold suppliers to their commitments, both for last year and next year. As the region faces changing weather and tighter reserve margins, it needs dependable supplies. Undermining this by making it easier on power plants that fail when needed is exactly the wrong thing for grid reliability.
Just before last Christmas, frigid temperatures overtook much of the country, pushing power grids to near crisis conditions. PJM had thought it was safe because of its capacity performance market, which pays power plants for committing to being available during emergencies. But then nearly 40 percent of the gas-fired power plants in PJM failed to deliver, bringing the region close to blackouts. The failures also limited PJM’s ability to help its neighbors, contributing to blackouts in Tennessee and the Carolinas.
As a result, PJM, the grid operator for 13 mid-Atlantic states and the District of Columbia, levied $1.8 billion in penalties against generators that had failed to perform during Elliott. All of the power plants facing penalties had been paid to be available and knew the penalty risk when they signed up. Even though they agreed to the penalty structure when accepting capacity payments, many are challenging the fines from FERC.
That is a crucial piece of the picture. PJM’s capacity market pays generators year-round. They get paid every day so that they can make necessary investments to maintain performance for when power is badly needed in tough conditions like Elliott. Generators have received tens of billions of dollars over the years under these agreements. But the companies that were happy to take this money are now claiming its unfair that they have to give back a fraction of it after they failed to deliver the exact thing they were getting paid for.
These power plant owners offer lots of excuses, trying to blame anyone but themselves. But the simple fact is that most of the gas plants failed because they didn’t adequately prepare for winter—they cut corners on the equivalents of putting antifreeze in your car or insulating pipes before a freeze.
About a third of the outages were because plants couldn’t get fuel, but that too could have been avoided. Many of the failed plants saved money by getting so-called interruptible contracts, arrangements that let the gas provider turn off the supply if a higher bidder shows up. They also decided not to invest in dual-fuel capability, which lets plants run on oil as a backup when gas isn’t available. Plants that took these shortcuts failed at more than six times the rate of the ones that prepared adequately. The plants that couldn’t get fuel have no one to blame but themselves.
Allowing generators who were paid to perform during emergencies to skirt accountability undermines reliability. It sends a clear message to the industry that it’s acceptable to take payment for promises you aren’t prepared to keep. Reducing the penalties for next year is even worse, since that makes saving money by failing to prepare even more financially attractive.
Bailing out the bad actors also punishes the companies that did the right thing. The lights stayed on Christmas Eve because of the companies that had spent the money and effort to prepare for harsh winter conditions. Letting those who didn’t off the hook or lowering the penalties for next year will force the good actors to reconsider their decisions because it harms them directly; the penalties collected are used to fund bonus payments to the power plants that had performed better than their commitments. Many such suppliers took extraordinary measures to stay running, in part because of these bonus payments. These suppliers have objected to retroactively changing the penalties—and rightly so. If FERC pulls back the bonuses these plants earned, we can be sure they’ll remember that the next time the phone rings on a holiday.
The two proposals to reduce penalties are simply a public bailout of bad investment decisions. The tens of billions of dollars those power plants received all came from ratepayers. PJM capacity costs make up a good chunk of our electric bills in the region, and we have every right to insist on getting what we’re paying for. That’s why state utility commissions and consumer advocates are both telling PJM to stay strong. Every dollar of forgiven payments will be paid for by the public in reduced reliability and greater risk of blackouts.