A Hopeful Sign for PJM Capacity Reform

PJM Interconnection, which coordinates the movement of wholesale electricity in all or parts of 13 states and the District of Columbia, announced it will undertake a comprehensive review of its capacity market. The welcome reform comes as PJM faces fallout from a controversial rule that threatens to push clean energy out of the market, and should go on to align PJM’s planning with state clean energy efforts and the needs of a low-carbon power grid.

PJM’s capacity market, known as RPM (for Reliability Pricing Market), is intended to ensure reliable power by contracting with power plants to meet predicted demand three years in advance. Capacity markets have been criticized of buying “too much of the wrong thing” at consumers’ expense, and PJM’s is no exception. Flaws in PJM’s current market design misspend several billion dollars each year. Needless conflicts between PJM rules and state energy policy are likely to cost consumers between $600 million and $1.8 billion per year as more state renewable projects come on-line. PJM’s promised reforms have the potential to eliminate these costs, give states more freedom to deliver the clean energy their voters demand, and create a level playing field for renewables to compete with traditional power plants.

There’s an old saying in the electricity industry, “Reliability is the last refuge of scoundrels.” Whenever a utility wants to charge customers for an extra power plant or to keep a poor investment running, they’re likely to argue it’s needed for reliability. It’s an effective argument: reliable electricity is a motherhood-and-apple-pie issue, but technical enough that it’s difficult to challenge utility claims. Politicians have incentive to look the other way—higher electricity bills might make for a few uncomfortable town hall meetings, but blackouts can end careers.

Deregulation was supposed to fix this. Markets, the argument went, are more efficient and less corruptible than regulated monopolies. All we needed to do was create a market for reliability and let competition find efficient, low-cost solutions. Sadly, things didn’t work out so well. Much as the tax code has come to be filled with special-interest provisions, the capacity markets that were supposed to deliver low-cost reliable power have turned into a maze of utility-friendly rules and barriers to competition. PJM’s capacity market, by one estimate, wastes about $4 billion a year keeping dozens of unneeded fossil power plants running.

Weaponized Barriers to Clean Energy

Worse, capacity markets have been weaponized by the fossil fuel industry as barriers to clean energy. A rule called the MOPR (Minimum Offer Price Rule) largely pushes clean energy resources built with state or local support out of those markets. This is the worst kind of crony capitalism: the rule forces power grid operators to ignore real clean power, and to continue building new fossil fuel plants that they know they don’t need. Obsolete, dirty power plants are protected from competing with cheaper, cleaner renewables.

The first order of business for PJM’s reforms will likely be rolling back the MOPR. If PJM allows the MOPR to sabotage state clean energy efforts, it is inevitable that more states will join New Jersey and Maryland in seeking to leave PJM’s markets. Well-run markets that support state clean energy policy are the best path to affordable low-carbon electricity; if the MOPR is not rolled back, states will have little choice but to develop alternatives to a market that works against their goals. If carried far enough, this threatens collapse of regional power markets and loss of the efficiencies they bring.

More Reform Is Needed

But to truly support a zero-carbon economy, the reforms to go further. PJM urgently needs to correct the flawed rules that cause them to buy too much capacity year after year. PJM needs to eliminate the barriers that restrict use of Midwest wind and Southeast solar. Capacity market rules need to evolve away from reliance on stand-alone traditional power plants to deliver the balanced mix of solar, wind, storage and other resources that make the low-carbon grid work. Markets need to reward customers who can shift their consumption to when power is clean and cheap, rather than hiding true costs and encouraging inefficient use.

These are tall orders. With their capacity market review, PJM signals that it is not shying away from the job. We hope and expect PJM’s leaders will show the courage to rebuild their markets around the needs of the future carbon free economy.