No Love for Grid Operator's Latest Costly Market Proposal

PJM, the electricity grid operator serving 65 million customers in 13 Mid-Atlantic and Midwestern states and the District of Columbia, is deciding whether it will again override its own stakeholders to propose yet another controversial and expensive electricity market rule change at the Federal Energy Regulatory Commission (FERC), the agency overseeing PJM.

The PJM board of managers is meeting today to consider approving a PJM staff proposal—that nearly 80 percent of PJM voting stakeholders have opposed. This proposal would fundamentally change the “capacity market” to make it even less like a real market for buying future electricity resources, funnel more money from consumers to power plants without creating additional value, delay power plant retirements and continue to crowd out newer, cleaner resources. Despite this opposition, PJM’s CEO is still seeking board approval.

The Organization of PJM states, consumers, some generators, and renewable energy, public health, and environmental interests have written to the PJM board to ask that it not approve the staff proposal for filing at FERC. Many of these organizations, including public interest environmental groups, have no vote in the PJM process and little access to the PJM board and thus felt that it was important to let the board know that they will be joining the chorus of protests should PJM file its proposal for FERC approval.

What is PJM’s proposal?

PJM’s proposal concerns its capacity market and would be a dramatic departure from how a market typically operates.

PJM’s capacity market procures commitments largely from coal, gas, and nuclear resources to supply the region’s power in the future. Demand response and energy efficiency resources can also commit to reducing the region’s electricity demand in the future—the goal is to keep electricity supply and demand in balance. Renewable resources also contribute to capacity, but recent rule changes have greatly limited their ability to earn capacity market revenues.

Typically, sellers bid into the market at the price they are willing to sell and the market determines a fair price and quantity to be sold to buyers. PJM, however, is proposing to determine what is a “fair” offer price for the resources that PJM deems are getting a “material” state subsidy and then determine the amount sold in a completely separate step. PJM determinations for what is “fair” or “material” are completely arbitrary.

As a result, the capacity market prices would be administratively inflated, more generation would be procured than what the inflated price would normally support in a true market, and the overall prices consumers would pay would increase.

What is the underlying concern?

PJM and its stakeholders have been grappling with the issue of how resources that receive state subsidies or preferential treatment can participate fairly in the capacity market. Some power plant owners are concerned that if a state subsidizes a resource and that resource can then bid into the market below its actual cost, the market price will decrease. Market prices have been lower than what PJM and generators had hoped, and the last round of capacity market changes were anticipated to raise prices, but did not do so significantly.

But if “low” prices are the problem, PJM has not tried to identify and assess the main potential causes of these “low” prices. In fact, PJM has provided no evidence that state subsidies are a cause at all. On the other hand, analysts have determined that a flood of new fracked gas generation coming online, as well as falling demand, brought down prices.

Indeed, if PJM were to study why its prices are “low,” it would likely find that it’s due to the vast amounts of generation oversupply in PJM compared to demand, and that “low” prices are a signal from a functioning market for the least efficient power plants to retire. These tend to be ailing and expensive coal and nuclear power plants. Allowing the surplus capacity to retire would allow prices to equilibrate to a point that would encourage a balance of new resource investment with retirements.

PJM’s proposal would only exacerbate the oversupply problem by delaying retirements and artificially incenting new power plant investments with inflated prices. Consumers would have to pay a higher price, as well as purchase more capacity than needed.

What should PJM do?

PJM should abandon its proposal and address more holistically how its capacity market is not procuring the types of capacity resources that states and consumers want and moreover procuring too much of these unneeded resources. We have some ideas here and here that we think PJM should consider to correct for the capacity market’s tendency to over-procure generation and to remove unreasonable market barriers to cost-effective and reliable wind and solar energy.