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PJM Asks FERC for Advice on Power Subsidies in Era of Natural Gas, Renewables

PJM Interconnection on Monday filed a nearly 500-page document with FERC seeking guidance on how competitive wholesale electricity markets should address state subsidies for faltering coal and nuclear power plants, and it put forth proposals to achieve the tricky balance as more legislatures in its service territory consider bailouts for the resources. 

The move is the latest in a fight that’s been unfolding for years over how best to value electricity and fairly compensate those that generate it. It also comes at a time when dozens of gas-fired power plants are being constructed in the PJM system.

Merchant generators have long faced stiff competition in the open market, but that has intensified in recent years with an increasing resource mix. Renewable energy has become more competitive and an abundance of low-cost natural gas has caused electricity prices to plummet, undermining coal and nuclear plants in the process.

PJM is the nation’s largest grid operator, serving 65 million people in all or parts of 13 states and the District of Columbia, including shale-rich Ohio, Pennsylvania and West Virginia. Illinois, part of the PJM system, has already implemented subsidies for struggling nuclear facilities. Other member states in Ohio, Pennsylvania and New Jersey, as well as those outside the system, have considered or implemented them too, threatening what opponents view as a subsidy contagion that could hurt more efficient fuels like natural gas.

PJM, for example, has noted that generation subsidies mask prices that otherwise would signal uneconomic resources to exit the grid and suppress prices that otherwise would retain efficient resources.

“Left unaddressed the subsidies will crowd out efficient, competitive resources and shift to consumers the investment and operational risks of generation,” PJM CEO Andrew Ott said Monday. “We seek the appropriate balance that respects state policy while avoiding policy impacts of a state’s subsidies on the market as a whole and on other states.”

In 2005, coal and nuclear resources generated 91% of the electricity on the PJM system. But over time, that mix has become more evenly balanced. From 2010 to 2016, PJM’s system was made up of 33% coal, 33% natural gas, 18% nuclear and 6% renewables, including hydro.

Merchant generators, or those that sell power into the wholesale market, currently account for 75% of PJM’s total generation. The wholesale market involves the buying and selling of power among generators and resellers, who include the electricity utility companies, competitive power providers and electricity marketers serving end-users.

Wholesale electricity prices can be determined by an auction in which generation resources offer in a price at which they can supply a specific number of MW hours of power. A resource clears the market and contributes generation when it submits a successful bid in an auction. The cheapest resource will clear the market first, followed by the next cheapest and so on until demand is met.

PJM put forward two proposals. The first is called Capacity Repricing, which would create a two-stage capacity auction. The method allows a state-subsidized resource to clear the first stage of an auction and receive a  capacity commitment from PJM based on the offer. The subsidized resource would then be repriced in the second stage to remove the effects of the subsidy, resulting in what PJM called a “competitive price for all resources.”

The other proposal would extend the existing Minimum Offer Price Rule to require a subsidized generation resource to remove the effect of the subsidy from its offer into the capacity market.  This method, PJM noted, could result in subsidized units failing to receive a capacity commitment.

Electric Power Supply Association (EPSA) CEO John Shelk said his organization welcomed PJM’s filing. While the EPSA represents nuclear, coal and renewable generators, more than half of its member assets are gas-fired. On any given day, they represent some of the largest gas buyers in the country.

“As events unfolding in New Jersey and other PJM states such as Illinois clearly show, the integrity of wholesale power markets is under serious attack by those seeking unjustified state subsidies for their nuclear and coal plants,” Shelk told NGI. He added that the Federal Energy Regulatory Commission must implement robust countermeasures to prevent subsidies from hurting the “beneficial competition that all PJM states depend on” to serve consumers.

“Whether that is best accomplished by either of the specific options PJM filed today, or some other proposal is better, will be determined by EPSA members in coming days,” he said. “EPSA is firmly committed to persuading FERC to make this docket a very high priority if competition is to endure.”

PJM’s filing comes a little more than a week after some of FirstEnergy Corp.’s wholesale generation subsidiaries filed for bankruptcy protection, impacting coal and nuclear power plants in Ohio and Pennsylvania. The subsidiaries said prolific Appalachian natural gas supplies have in part eroded profits from power sales.

FirstEnergy is pushing the U.S. Department of Energy to invoke a rarely used section of the Federal Power Act that would direct PJM to secure long-term capacity for nuclear and coal-fired plants to compensate owners for the baseload power they provide.

PSEG Inc. wrote the DOE to indicate its support for FirstEnergy’s filing as legislative hearings in the state got underway last week on two bills that would benefit nuclear facilities operated by the company and Exelon Corp.

Shelk said EPSA has strongly opposed subsidies for years, adding that FERC has done little to address the issue. Next month, for example, PJM  will hold another primary capacity auction in which resources compete for the right to supply consumers three years forward. Without the kind of countermeasures PJM and others are seeking, Shelk said, subsidized resources can bid below their actual costs.

Absent any action, that could continue in future auctions and more states could implement subsidy programs in the meantime, which would have a more profound impact on competitive wholesale electricity markets.

Given that reality, PJM has asked FERC for an order on its Monday filing by June 29, which it said would allow sufficient time to implement changes for the May 2019 annual capacity auction. PJM also suggested a settlement judge process for any outstanding issues the Commission identifies.

 

 

 

 

 

 

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