PJM (and Others) Weigh In on the Place for Subsidized Resources in its Capacity Market

The first round of briefing in FERC’s paper hearing to consider the issue of “out-of-market” payments in PJM has concluded (Docket No. EL18-178).  On October 2, PJM filed its initial submission, which focuses on an expanded Minimum Offer Price Rule (MOPR) and a Resource Carve-Out.

PJM states that it designed its proposal with two broad principles in mind:

(i) an important underlying objective stated in the June 29 Order—namely that states which choose to support generation for policy reasons not recognized in the Commission-regulated wholesale markets assume all costs associated with this decision in a transparent fashion; and

(ii) an understanding the Commission, in setting just and reasonable rates, can exercise informed judgment to adopt reasonable balances and draw distinctions based on materiality to accommodate varying industry objectives in an environment of cooperative federalism.

PJM states that its proposed MOPR expansion would apply to all fuel and technology types, as well as to both new and existing resources (with limited exceptions).  The Resource Carve-Out would apply to resources subject to the MOPR that are receiving a state subsidy.  PJM notes that its limitations on the Resource Carve-Out include an “[a]cknowledgement that if the amount of capacity carving out becomes so large going forward, PJM and the Commission will need to evaluate whether the residual market is sufficiently robust to perform effectively and consistent with the [Federal Power Act].”

PJM’s proposal would consider any subsidy to be covered under the proposal except: generic economic development subsidies not specific to the electricity sector; a resource-specific subsidy that is 1% or less of expected PJM revenues the resource would get; renewable energy credit (REC) programs where the purchaser is not required by a state program to purchase the REC and does not receive any state financial inducement to do so; and federal subsidy programs enacted before March 21, 2016.

Numerous other parties filed initial submissions on October 2.  Reply briefs are due November 6.  And there are several pending requests for rehearing of FERC’s June 29 order that established this paper hearing.

Meanwhile, the proportion of natural-gas fired generation in PJM has increased over the past five years (similar to trends seen elsewhere in the U.S.).  Average annual capacity factors for natural gas-fired generators in PJM have been increasing, and there have also been additions of natural gas capacity in the region (primarily combined-cycle units).  These natural gas units have started operating more often as baseload units rather than load-following or peaking resources.  Lower natural gas prices (in part based on location) is the likely driver.

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