PJM: Regional Cooperation Leads to Lower Costs and Enhanced Reliability

Regional grid operator PJM, the regional transmission organization (RTO) with responsibility and authority to coordinate the efficient movement of electricity, has concluded that cooperation with other states is the cheapest and most beneficial way for states to meet their pollution reduction targets under the U.S. EPA's proposed Clean Power Plan. The proposed Clean Power Plan delivers the first-ever limits on climate-change causing carbon pollution from the oldest and dirtiest power plants.

The findings give PJM states hard evidence of the benefits of regional compliance planning: lower costs and more flexibility. As states begin to write plans to determine how they will reduce carbon pollution, they should bear PJM's encouraging analysis in mind, so they can address climate change in a way that lowers costs and maximizes benefits.

Let's first briefly review the findings of the study, then walk through the way PJM set up the analysis, and finally, look at a few of the states for some more insights.

Regional cooperation leads to lower compliance costs.

In a study released last week, PJM, which serves thirteen states in or near the Mid-Atlantic and Midwestern regions, as well as the District of Columbia, found that regional compliance agreements will make compliance more economical while achieving compliance with the proposed Clean Power Plan.


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Source: PJM.

As PJM stated in its report, "State-by-state compliance options, compared to regional compliance options, likely would result in higher compliance costs for most PJM states. This is because there are fewer low-cost options available within state boundaries than across the entire region." The figure below, taken from the report, demonstrates that under several cases with varied assumptions about levels of renewable generation, efficiency, and natural gas generation, complying on an individual state basis is universally more costly.

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Source: PJM.

Above, the cost bars on the left represent estimates with renewables and energy efficiency included; costs increase moving to the right as the amount of clean energy deployment declines.

Regional compliance also improves electricity system flexibility, mitigating concerns surrounding legacy fossil plants.

The PJM study also found that regional compliance, rather than go-it-alone state compliance, could support electricity grid functioning and reliability by providing more flexibility and avoiding the possibility of "stranded costs" associated with early retirement of older, inefficient units. Compared to state-by-state compliance schemes, the capacity of fossil fuel-fired power plants (including coal and oil/gas steam plants) at risk of retiring on an economic basis under a regional compliance scheme falls by about half. The figure below shows that significantly less fossil capacity was defined as "at risk" according to PJM's benchmarking methodology (we'll come back to that in a moment) in the regional compliance scenarios than in the single state-only compliance scenarios.

The study acknowledges that fossil steam unit retirements are expected to occur gradually over time. Of even more importance, the study suggests the best and smartest strategy to maximize benefits under the Clean Power Plan is to redouble efforts to invest in clean energy resources and services, including wind, solar and energy efficiency.

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Source: PJM.

As you can see above, PJM's estimates that dramatically fewer fossil plants would be at-risk of retirement in the regional compliance scenarios relative to single state-only compliance scenarios.

PJM examined state and regional compliance across a range of scenarios, and defined plants at-risk of retirement based on operating costs.

PJM initiated its study of the Clean Plan at the request of the Organization of PJM States (OPSI), which represents all of the states in PJM's service territory. OPSI asked PJM to study six different scenarios of the future: five of them assumed states would comply with the Clean Power Plan using regional "mass-based" compliance (i.e., carbon allowance trading among all units in the region under an emissions cap); one scenario assumed state-based trading (i.e., trading of carbon allowances within state boundaries). The OPSI scenarios included a gas price sensitivity case (assuming gas prices are 50% higher in the future) and a constrained nuclear sensitivity case (assuming 50% of the nuclear capacity retires).

In addition to these six OPSI scenarios, PJM also studied eight scenarios it developed independently. Of these eight PJM-defined scenarios, five assume regional mass-based compliance and two assume state-based compliance trading. One of the scenarios also assumes an emission-rate-based regional approach.

Each of the scenarios assumes various levels of energy efficiency savings and renewable energy. The highest energy efficiency and renewable energy scenarios were based on existing and planned resources for renewable energy and the amount of energy efficiency assumed by EPA in establishing state targets. There are no scenarios containing more ambitious assumptions for these clean resources. PJM relied on its 2014 transmission planning case (referred to as "RTEP" in the report) as the "business as usual" Reference Case, which is what PJM predicts will happen in the future absent Clean Power Plan-based carbon pollution reductions.

In each of the policy case scenarios, PJM iteratively applied a carbon price until the modeled emissions outcome met the mass-based targets that PJM independently calculated based on guidance provided in the EPA's technical support documents. In order to calculate the mass-based targets, PJM relied on the approach covering existing sources only as described in the EPA's November 6, 2014 technical support document on rate-to-mass translation. PJM derived rate targets using EPA's methodology but applied it to its own data set covering only the units in the PJM footprint. As a result, the emissions rate and mass-based targets PJM derived do not precisely reflect the EPA's proposed targets (though they are relatively close).

As the operator of the largest electricity market in the world, one of PJM's primary responsibilities is to ensure that the system it oversees is reliable, while also delivering electricity at the lowest possible cost. To accomplish this, PJM must evaluate the economics of the plants operating in its footprint. As part of the analysis released last week, PJM provided a benchmarking analysis identifying plants in its market which are economical and those which are not and thus at risk of retirement. To define power plants at risk of retirement, the PJM study uses a simple benchmarking comparison, evaluating the ongoing revenue requirements of operating a fossil plant against the cost of building a new power plant (what PJM calls the Net Cost of New Entry, or the Net CONE). A plant with a revenue requirement that is higher than the cost of building a new plant is more likely to close. PJM is careful to point out that, simply because a unit is considered at risk for retirement, it does not mean that the unit would actually retire. For example, the units PJM has identified as at-risk could receive capacity revenue from its capacity market commitments that could assure its continued operation. This suggests that PJM's estimates of at-risk plants may be overstated, and that stranded costs and reliability could present minimal risk over the extended time frame expected for coal plant retirements.

In brief, the PJM analysis offers some remarkable state-level insights, showing that most states will enjoy economic benefits no matter what the policy.

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Source: PJM.

Virginia

According to the PJM study, Virginia is one of the states that can count on economic upside. In both PJM's high and low renewables and energy efficiency scenarios, PJM predicts that Virginia will be a seller of carbon credits. Its state CO2 price falls beneath the regional CO2 price in each scenario. If Virginia retains its nuclear plants and builds already-approved fossil units as planned, fulfills its (optional) RPS requirement and 50% or more of the EPA's assumed level of achievable EE, it will overcomply beginning in 2020 and be able to sell credits to other states in the region. Other PJM states with similar projected outcomes include Kentucky, North Carolina, Maryland, and Delaware. For more details on Virginia, please see my colleague Walton Shepherd's posting.

Pennsylvania

PJM projects that under the scenarios it assessed in this analysis, Pennsylvania would be close to the perfect broker of emissions credits in the region. CO2 prices in Pennsylvania (in 2020) are in line with the regional CO2 price in both high and low renewables and energy efficiency cases, as well as in the limited new natural gas scenario. Pennsylvania holds a unique position among the PJM states. It is the only state in which the state CO2 price consistently tracks the regional CO2 price across all scenarios, suggesting that Pennsylvania's position in the market would likely be unchanged under either state or regional compliance, and it could continue to export power to neighboring states as it does today.

Ohio

In this analysis, PJM projected CO2 prices in OH above the regional average across the scenarios, indicating that it would be a purchaser of credits. However, to put the magnitude of purchases in context: in 2020, PJM estimates the value of the credit purchase to be a maximum of $2.2 million in the primary policy cases (excluding the high natural gas and nuclear retirement scenarios). One limitation of this study with respect to Ohio in particular is that the levels of renewable energy and energy efficiency assumed even in PJM's high scenario are lower than the levels that Ohio's current policies require. Assuming those levels, Ohio would be able to achieve its final 2030 target years in advance. We can presume that the projections for Ohio in PJM's study would also be more favorable if the scenarios reflected current policies, rather than the limited view of renewables and energy efficiency in the OPSI scenarios. For more on Ohio, please see my colleague Sam Williams's posting.

Overall, the PJM analysis confirms that the PJM states have a lot to gain by forming a regional agreement for Clean Power Plan compliance. Compared with individual go-it-alone state compliance, regional cooperation lowers compliance costs and enhances electric system reliability.

About the Authors

Starla Yeh

Senior Policy Analyst, Climate & Clean Air program

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