Author: Jeff Dennis,Prusha Hasan,and Caithlin Marquis     Published: 9/9/2020         AEE

FRR Question-745

Frustrated by recent decisions from the Federal Energy Regulatory Commission (FERC) and dismayed to see their policy objectives undermined by wholesale market rules, a growing number of states are considering taking matters into their own hands. Specifically, in response to FERC’s rulings disadvantaging resources that benefit from state clean energy policies, some states in PJM Interconnection and ISO New England, along with New York, are considering alternatives to centralized capacity markets – including leaving these markets altogether. An AEE background paper released last week cautions that leaving an independently operated capacity market is no quick fix for the curve balls FERC has thrown at states. Rather, leaving centralized capacity markets is a fraught choice that should be pursued only if all other potential pathways have been thoroughly exhausted. Make no mistake – the current FERC majority is attempting to undermine clean energy and state choices. Even in the face of that threat, though, states would be better off working with RTOs/ISOs and other stakeholders to identify reforms to energy, ancillary services, and capacity markets to align them with state clean energy policies, rather than undermine them.

FERC’s recent expansion of the minimum offer price rule (MOPR) in PJM has elevated the profile and urgency of concerns that also exist in ISO-NE and NYISO. When FERC issued its controversial decision in December 2019, it required PJM to set an artificial price floor for state-subsidized generation (such as wind and solar). FERC’s intent was to reverse “price suppression” caused by state policies. What the MOPR will actually do is limit the ability of advanced energy resources to participate in the nation’s largest electricity market and undermine state policies that are explicitly intended to promote advanced energy deployment.

States are now looking for solutions, and many are considering directing their utilities to leave the capacity market altogether, an option called the Fixed Resource Requirement (FRR) in PJM. Through the FRR, a utility would withdraw from PJM’s capacity market and be responsible for procuring  capacity resources to meet its share of the region’s resource adequacy requirements. In PJM, the New Jersey Board of Public Utilities (NJBPU) has initiated a formal investigation into this possibility and scheduled a technical conference on September 18. Less formal discussions are underway among legislators and regulators in Illinois and Maryland, among other states.

Outside of PJM, the New York Public Service Commission and Connecticut Department of Energy and Environmental Protection, like the NJBPU, have also initiated formal investigations and held hearings on alternatives to RTO/ISO centralized capacity markets. (New York may have gotten a further push in this direction by an order from FERC issued late Friday rejecting a NYISO proposal to modify its “buyer side mitigation” rules – its analogue to MOPR – to recognize that capacity resources that align with that state’s Climate Leadership and Community Protection Act, which requires 70% of New York’s electricity to come from renewable energy by 2030, were more likely to get built than proposed fossil-fuel power plants.)

The appeal of FRR is clear: By allowing states, and not FERC, to set the rules for meeting resource adequacy requirements, it would avoid the harm of MOPR. But the option comes with uncertainty and a host of risks. For starters, the FRR is likely to balkanize the regional market into smaller submarkets. It also leaves unanswered questions about how states will procure the capacity needed to maintain resource adequacy. States will have to create new procurement structures from scratch (since few have any kind of structure in place today), and developing these markets and deciding which resources can participate will take time. If states decide to put regulated utilities back in control of generation development, clean and emerging technologies can be excluded or put at a disadvantage. In short, FRR could result in a drastically less competitive market – and once a utility chooses this route, it is locked out of the capacity market for at least five years.

Advanced energy companies are concerned that FRR-based responses to MOPR will erode the benefits of regional competition, limit access to a diverse array of advanced energy technologies on a regional basis, create new barriers to market participation, and increase the costs of meeting clean energy goals. Large, independently administered markets have historically opened up more opportunities for advanced energy developers while lowering prices for customers. This is why AEE, in concert with other clean energy trade organizations, has been continuously warning of the uncertainty and unintended consequences of FRR.

Sitting by while MOPR disrupts and delays achievement of state clean energy policies is clearly not a good option, either. So what should states do? AEE’s background paper, “No Quick Fix: Why Fixed Resource Requirement is Not the Best Way for States to Protect Their Energy Choices,”  offers three steps states can take before resorting to FRR. First, states should work with RTOs/ISOs and stakeholders to develop reforms that would better align market rules with state policy objectives. There are a number of proposals worthy of consideration and further development—from a forward clean energy market to improved price formation to various capacity market reform options—and stakeholders in both PJM and ISO-NE have begun these discussions. Second, states should pursue new or expanded carbon pricing mechanisms, which would better align markets with state policies while also partially counterbalancing the harmful effects of MOPR. Third, states should consider expanding direct environmental regulation of polluting power sources. This option lies firmly within state jurisdiction, and would help to shift the economics of the resource mix into better alignment with state policy targets.

Consideration, design, and implementation of these three recommendations will take time. The urgency of addressing the harm of MOPR in PJM hinges at least in part on how FERC rules on PJM’s compliance filing; if the Commission accepts the filing largely as is, it will take a few years for the worst effects of MOPR to kick in. That means that states have time to develop the right solutions rather than jumping quickly into the most readily available solution, with its considerable risks. Likewise, there is time for measured consideration of the best path forward in New York and New England states if the discussions already started move at a pace that matches the urgency of the challenge.

While a lot of the focus is on what actions states could or should take, the advanced energy industry also has a responsibility to engage with states and RTOs/ISOs as discussions continue and reforms are discussed. And to be sure, FERC – and potentially Congress – will be key moving forward. If FERC continues to escalate its attacks on state clean energy objectives and stands in the way of market reforms to align wholesale markets with those objectives, Congress may need to intervene.