A coterie of independent U.S. natural gas-fired electricity generators urged FERC on Thursday to weigh the “potential for enormous damage” to competitive wholesale markets when the Commission decides on state subsidies for nuclear and renewable energy facilities.
The letter was signed by eight merchant generators that have invested more than $17 billion to construct 17,500 MW-plus of generation since 2010 in the PJM Interconnection, with an additional 7,000 MW in development. The missive was filed as the Federal Energy Regulatory Commission and PJM grapple with how the wholesale market should best accommodate growing subsidies for certain fuel types in a massive proceeding that’s expected to culminate in a decision next month.
The merchant generators said that despite the array of proposals put forward, the Commission’s choice is stark: to preserve or “kill” competitive power markets. Fossil fuel generators have argued that state subsidy programs allow nuclear and renewable sources to bid below cost during capacity auctions, which they claim suppresses energy prices and undermines the competitive power markets.
Any FERC order in the PJM proceeding that results in price suppression would “significantly undermine the basis for continued unsubsidized investment” in the region and “represent a breaking of the regulatory compact that has driven tens of billions of dollars of recent investment into PJM -- all based on the investors’ expectation of a level playing field,” the companies said.
The letter was signed by Calpine Corp., Ares Power and Infrastructure Group, Caithness Energy LLC, Competitive Power Ventures Inc. (CPV), J-Power USA Development Co. Ltd., Panda Power Funds LP, Advanced Power affiliates, and Tenaska Energy Inc. Independent gas-fired producers are typically the single largest purchasers of natural gas in the country on any given day. Tenaska alone sold or managed 9.5 Bcf/d in 2017.
The power generators stand to lose if subsidies were to get a leg up. Calpine is the nation’s largest gas-fired and geothermal energy producer, with dozens of plants in 24 states, Canada and Mexico. More than one-third (36%) of its generating portfolio is partly in PJM’s footprint in the eastern United States, where it has 9,339 MW of capacity. Other companies like CPV and Advanced are developing projects in shale-rich Ohio and Pennsylvania. Panda Power in 2016 brought the first two plants online that use Marcellus Shale gas.
PJM in October was forced to file a revamped proposal with FERC to better accommodate state subsidies after the Commission rejected an earlier proposal in a landmark decision that directed the grid operator to rewrite its capacity market rules to address the subsidies. FERC went further, suggesting a modification to the current Fixed Resource Requirement (FRR), which allows utilities to leave the capacity market if they can meet demand with their own resources. FERC’s Alternative FRR would specifically allow renewables and nuclear plants to leave the market, allowing their subsidies to exit with them.
In their letter, the gas-fired generators pointedly said that the “FRR alternative...without any type of mechanism to avoid widespread discrimination against existing non-subsidized generation, would in fact end the competitive PJM capacity market as we know it.”
PJM’s latest proposal would, among other things, still employ a stringent Minimum Offer Price Rule (MOPR), or a floor price for its capacity auction that would prevent generators from artificially depressing the clearing price. Low clearing prices that are not a result of market forces alone, PJM said, would discourage innovation and investment in new, more efficient generation, which it identified as “one of the most important and effective functions of the competitive electricity markets.”
The gas-fired generators want the commission to examine the California Independent System Operator and the Midcontinent Independent System Operator (MISO) to gauge the effects of widespread subsidies.
“The mandate‐driven procurement efforts in California and the non‐MOPR capacity
market in MISO have not driven any competitive investment for over a decade,” they wrote. “If FERC were to implement a tariff that effectively resulted in a residual capacity market, the same could be expected in PJM, with future investment being met by subsidization or explicit procurement mandates.”
The fight has unfolded as courts in Illinois and New York have upheld subsidies for nuclear plants, while other states like New Jersey and Connecticut have implemented similar programs. Even lawmakers in Ohio and Pennsylvania, where unconventional natural gas production is dominant, are considering their options. The Pennsylvania legislature’s Nuclear Energy Caucus recently rolled out a long-awaited report exploring alternatives to support the state’s ailing nuclear facilities.
Competition in the power markets has intensified with an increasingly diversified resource mix. In recent years, renewable sources have 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. As a result, states have enacted subsidy programs to support nuclear facilities, valuing the resilient baseload power they provide and their zero-smog qualities. Complicating matters, the Trump administration continues to push for additional support for coal and nuclear.
PJM serves 65 million people in all or parts of 13 states and the District of Columbia. Gas-fired generation has proliferated in PJM’s footprint, driven primarily by rising production in Ohio, Pennsylvania and West Virginia. There are currently 25 gas-fired facilities under construction or being upgraded in the market, according to PJM’s services queue.