FERC's recent rejection of two proposals by PJM Interconnection to help the grid operator address state subsidies for uneconomic coal and nuclear power plants sets wholesale markets and state policies on divergent paths, rather than integrating them, according to an analysis by Brattle Group economists.

In the discussion paper, Brattle argues that technology-neutral regional market solutions offer the most attractive path forward for meeting states' emissions reduction goals cost effectively. The economists point to price or cap-and-trade markets for carbon emissions, and regional forward markets for clean energy attributes as examples of alternative market-based tools.

In rejecting PJM's proposals in late June, the Federal Energy Regulatory Commission acknowledged that the wholesale electricity market overseen by PJM has “become untenably threatened” by the subsidies provided or required by some states for certain generation resources.

PJM had put forward two proposals; one to create a two-stage capacity auction, and the other to extend its Minimum Offer Price Rule (MOPR), which currently only applies to new generation sources, by requiring a subsidized generation resource to remove the effect of the subsidy from its offer into the capacity market.

While FERC rejected both proposals, it consolidated PJM's docket with a complaint filed by Calpine Corp. against the grid operator's existing MOPR, which Calpine argued is “unjust and unreasonable” because it does not address the impact of subsidized existing resources. The Commission set the consolidated proceeding for an expedited hearing in which stakeholders  will consider applying the rule to all new and existing resources that receive out-of-market payments, or subsidies.

FERC, which expects to have a decision on the consolidated proceeding by January,  advocated for eliminating existing exemptions for resources supported by renewable portfolio standards, federal tax support and the Zero Emissions Credit programs that have passed state legislatures to support nuclear power.

The Brattle economists argue that charting a constructive path forward will require states and system operators to work together to resolve growing dissonances between states' policies and wholesale market designs.

"The regional wholesale market operators should embrace states' and customers' growing demand for a cleaner electricity system," said Brattle's Kathleen Spees, co-author of the discussion paper. "States could capitalize on the regional markets' ability to deliver more competitive, low-cost, and innovative solutions. As the generation fleet transforms toward an ever cleaner energy mix, regional market-based mechanisms will be more valuable than ever to guide investments to the fleet that can provide energy, reliability, flexibility, and clean-energy attributes at least cost.”

Spees recommended a more sustainable path with an expanded wholesale power market design that includes clean-energy attributes, and in some cases expanded carbon pricing or cap-and-trade. That would put states, wholesale customers, and system operators "in the best position to harness the full benefits of competitive markets to identify the most cost-effective and innovative solutions for a reliable cleaner grid," she said.