Auction Shows Mid-Atlantic/Midwest Consumers Will Pay More and For Dirtier Electricity Under New Rule

Jennifer Chen (Alum)

PJM, the grid operator serving 61 million energy customers in the Mid-Atlantic and Midwest, has released its latest "capacity" auction results determining how much energy resources can charge to supply PJM's region with adequate electricity in the future. This year's auction generated about $10.9 billion, mostly for power from fuel-burning plants, which means that electricity consumers in PJM's region will be paying roughly that much to support these plants over one year.

It also is $3.4 billion more than last year's auction - and that whopping 45 percent increase - which utility customers ultimately will pay for - is driven by PJM's new rules dictating which energy resources can sell into its market.

The new rules were only partially implemented for this year's auction, which meant that clean energy resources were largely able to participate as before. But the auction results show that carbon-free power, such as wind and solar, did not earn as much as most fossil plants, which were eligible to receive higher payments under the new rules. As PJM ramps up to fully implement its new rules in future auctions, emissions-free resources will find less opportunity to participate in the capacity market, and costs to consumers will further increase. Because of these concerns, the Sustainable FERC Project coalition opposed PJM's rule changes and asked the Federal Energy Regulatory Commission to reconsider its approval of PJM's rules.

Source - PJM: PJM's service territory.

What is PJM's capacity market auction?

PJM's capacity market auction is a means of ensuring adequate future electricity supply to its customers; it determines which energy resources will supply the region three years into the future and how much utilities will pay for them. (The lead time is what's needed to build new power plants if necessary.) Every year, energy suppliers submit competing bids, and resources that can provide the "capacity" to deliver electricity at lowest costs win the bids. Depending on which resources prevail, the revenues may go toward building natural gas plants; keeping old, inefficient coal plants online; or procuring clean energy. Although utilities pay for these resource commitments, the costs are ultimately passed on to us, the end-users of electricity.

Plant failures don't justify the high costs of new market rules

Since 2007, PJM's capacity market has chugged along, procuring new generation and ensuring that the region has sufficient resources to keep the lights on. But the 2014 polar vortex proved too much for some natural gas and coal plants - it was so cold that coal piles froze and poorly maintained gas plants could not operate. More than one-fifth of fuel-burning plants in the PJM region could not deliver energy as promised on the coldest days during that period. Even then, PJM had sufficient resources to preserve reliability throughout that winter - and the winter of 2015 when the polar vortex returned. Meanwhile, power plant performance continues to improve as PJM and plant operators identify and address specific problems causing plant failures.

Despite these improvements and the fact that no customers lost power, PJM perceived a need to drastically change its capacity market rules, not just for the problematic power plants, but for all capacity market resources. PJM is now requiring that all resources be available whenever needed throughout the year. Perversely, these new rules will hurt the very resources that performed the most reliably during the polar vortex, such as wind power (the brutal winter winds, at least, provide cheap electricity) and demand response (paying customers to cut electricity use when the grid is stressed). These resources are not available all year (i.e., sometimes the wind doesn't blow), and as PJM ramps up to fully implement its new market rules, those clean energy resources will be pushed out of the capacity market.

Requiring all resources to be available year-round ignores the fact that seasonal resources, such as summer-only demand response, work well in aggregate with other capacity resources and provide capacity at lower costs to consumers. For example, it's cheaper on the hottest summer days (when everyone is running the AC at full blast, stressing the grid) to pay willing customers to curtail or shift electricity use instead of firing up backup power plants, which tend to be inefficient and highly polluting, to accommodate greater electricity use.

Further, it is expensive for PJM to keep a fleet of power plants that are all available all the time. (It is a bit like a taxi fleet operator maintaining an entire fleet of idling Hummers, ready at any time, under any condition.) As the auction results show, the new rules cost about $3.4 billion a year. Perhaps the expense could be justified if the benefits are high enough, but PJM estimated that customers would benefit by about $2.2 billion from the rule change. Because the benefits came at a cost of $3.4 billion, the net customer "benefit" is minus $1.2 billion a year, which isn't a very good deal.

PJM also contends the new rules are necessary for reliability, but the grid was reliable under the old rules, even under extreme weather circumstances. Recognizing that there is no such thing as absolute 100-percent everything-proof reliability, do customers paying for gold-plated reliability really want it given the price tag?

How do PJM's rules and auction results relate to the EPA's Clean Power Plan?

The capacity market is a forward-looking market; its rules can drive investment in certain resources and should be informed by power sector policies. But PJM, in designing its market rules, did not consider or mention the landmark Clean Power Plan to reduce carbon pollution from power plants. Had PJM taken into account the value of carbon-free resources, it could have proposed rules facilitating a cleaner grid rather than foisting on consumers the high costs of building out and fortifying a fleet of fossil plants.