On August 18, 2016, PJM Interconnection, L.L.C. (“PJM”) presented aproposal to its stakeholders outlining a possible mechanism for mitigating the potential impact on capacity prices in the PJM market of generation units receiving revenues from state-regulated programs.1 The proposal, in the form of a short white paper, was presented as part of a symposium on market efficiency and public policy.2 The potential impact of state-supported generation on Regional Transmission Organization/Independent System Operator (“RTO/ISO”) capacity markets has become increasingly relevant as state regulators and lawmakers consider adopting programs to provide revenues outside of the RTO/ISO capacity markets to support the construction of new generation and, more recently, the retention of existing generation. States are considering providing such out-of-market revenues to promote a variety of public policy objectives, including price stability and environmental and clean energy goals. Opponents of such programs, including other generators competing in the wholesale markets, assert that the out-of-market, ratepayer-backed revenues have a price-suppressive effect in capacity auctions. Price suppression, they argue, will erode the price signals that those markets are designed to provide to incent competitive suppliers to enter the market. PJM’s recent proposal to address these potential market impacts, while unique, leaves many questions unanswered.
PJM already applies the Minimum Offer Price Rule (MOPR) to mitigate the effect of new resources with out-of-market revenues on capacity prices. While some generators have proposed expanding the MOPR to cover existing resources that are receiving out-of-market revenues, PJM concludes in its recent proposal that the application of the MOPR to existing generation is likely to result in the commitment of more resources than are needed to maintain reliability because state regulators may keep a unit that is serving public policy goals running even if that unit fails to clear in the PJM auction. Moreover, such a scenario would require that load “pay twice” for capacity, since it would pay both the PJM capacity price for all of its capacity obligations and the retail rate charges that were implemented to fund the state program.
PJM is therefore proposing a two-stage approach to determine cleared commitments and clearing prices in the capacity auction. The first stage would be used to determine capacity commitments. Units receiving out-of-market revenues and a commensurate amount of local demand would be removed from the auction, and the units in question would be considered “committed” for the year. The auction mechanism would then be run using the remaining resources and demand. This stage would determine which of those remaining units (those without out-of-market revenues) would be committed to provide capacity for the year.
For the second stage of the auction, the units receiving out-of-market revenues and the related demand would be added back into the auction, together with the committed units without out-of-market revenues, to determine the capacity clearing prices. The units receiving out-of-market revenues would then be bid into the auction at a reference price approximating the unit’s going-forward costs. The resulting clearing price would be paid to all committed units without out-of-market revenues.
The units receiving out-of-market revenues, however, would not receive PJM capacity payments, and the related demand would not pay PJM for an equivalent amount of capacity from those units. PJM explains that:
[T]he subsidized resources that were held out of the first stage of the auction would receive no revenue from the PJM capacity market. Rather, the regulatory authority that had determined that these resources should be subsidized would determine how these resources would be compensated and be solely responsible for providing that compensation. Similarly, the related demand would also not be responsible for paying the clearing price for capacity resulting from the auction, because the regulatory agency subsidizing the resources would decide what price customers representing the related demand should pay for the capacity associated with the subsidized resource and charge that price in retail rates.3
PJM’s proposal is short—only six pages—and thus leaves additional details to be resolved. PJM observes that the most significant question to be resolved is what constitutes a “subsidized” unit. Because the proposal denies PJM capacity payments to subsidized units entirely, this is a crucial question. As written, it seems to create an economic disincentive for states to provide out-of-market revenues that are less than the anticipated PJM capacity price (i.e., any amounts that would be less than the amount that a generator could expect to receive in PJM capacity payments). It is also unclear whether the policy would apply to indirect subsidies, such as tax credits for renewables.
It is also not entirely clear how this proposal would work in practice. PJM specifies that related load would be removed from the auction and would not be responsible for capacity payments for the subsidized capacity, but it is not clear how PJM would determine which load-serving entities would be considered related load. Another question is whether, under the Supreme Court’s decision in Hughes v. Talen Energy Marketing,4 state regulators would have the authority to determine the price for capacity, as PJM suggests.
1 Stu Bresler, PJM Interconnection, L.L.C., Potential Alternative Approach to Expanding the Minimum Offer Price Rule to Existing Resources (2016).
2 Grid 20/20: Focus on Public Policy Goals and Market Efficiency, http://www.pjm.com/committees-and-groups/stakeholder-meetings/symposiums-forums/grid-2020-public-policy-goals-mkt-efficiency.aspx (last visited Aug. 30, 2016).
3 PJM Proposal at 3.
4 136 S.Ct. 1288 (2016).