PJM’s MOPR Impact on the Capacity Market

PJM is an electric grid operator that covers thirteen states, plus the District of Columbia, making it the United States’ largest regional transmission organization (RTO).  At the end of 2019, the Federal Energy Regulatory Commission (FERC) ordered PJM to make rule changes to its capacity market to try to preserve market integrity due to the increasing number of state-subsidized generation resources, which would raise the bids of resources that receive or are eligible to receive state subsidies that are selling their power into PJM’s wholesale capacity market.  This includes renewable energy credits (RECs) used to promote renewable energy and zero-emission credits (ZECs).  It requires that nearly all state-subsidized power resources reach a predetermined price floor in order to participate in PJM’s capacity auctions.  The new rules will likely significantly restrict the participation of new renewables in the capacity market.  New renewables are going to be required to offer initial bids that are much higher than recently cleared capacity prices, according to Resources Magazine.  So, what does this mean for PJM’s capacity market how is this going to affect consumers?

PJM Capacity Market

New resources that receive subsidies will now have to deal with the Minimum Offer Price Rule (MOPR), which raises the price floor for the resources trying to sell their power into the PJM wholesale market.  Expanding the MOPR in this way produces an artificial price floor that does not reflect the actual marginal costs of renewable resources.  Using the MOPR for the renewable generation will limit opportunities for those resources to earn revenue from the PJM market for the value of their capacity. According to the FERC, these rules were set in place to protect the competitive capacity market and stop state-subsidized resources from artificially deflating capacity prices by directing PJM to expand its current MOPR to address state-subsidized electric generation resources.

Because of the FERC’s new rules, some states moving towards 100% carbon-free energy by 2050 are looking for a way out of PJM’s capacity market.  On March 27, the New Jersey Board of Public Utilities (BPU) launched an investigation into how they can still achieve their clean energy goals.  Experts are saying New Jersey’s alternatives to the capacity market include “developing a Fixed Resource Requirement (FRR) approach or adopting a statewide clean energy standard that requires load-serving entities to deliver higher percentages of carbon-free energy.”  Illinois also feels that in order to reach 100% clean energy they may need to leave PJM’s capacity market. Illinois’ Clean Energy Jobs Act is working towards 100% renewable goals by 2050. John Moore, the director of NRDC’s Sustainable FERC Project, said that the capacity market (PJM) is “ill-suited to a future world of high renewables and zero-carbon power.” States have a big decision to make regarding whether they want to stay in PJM and risk holding themselves back from reaching their renewable energy goals or leaving PJM and potentially changing how the system functions.

How does this impact PJM’s customers?

The order would cause rates to rise for PJM customers and give existing resources, that are mainly made up of non-renewables, a leg up over new entries that are largely made up of renewable resources.  Clean energy advocates worry the FERC’s decision will deter incentives to bring new zero-emissions resources into the market.  According to Utility Dive, the plan could raise market costs from a range of $2.4 billion to $8.4 billion annually.  It’s been pointed out that excluding renewable capacity from capacity markets will mean that more capacity will be built than is needed with “phantom” renewable capacity being held outside of established capacity market structures, according to The National Law Review.  If this happens, customers could be forced to pay for capacity twice, once under the state policies mandating the renewable construction, and a second time when other capacity is purchased to fill the need the renewable capacity could have filled in the capacity auction.

To learn more about PJM capacity prices, download the Electricity Markets Explained report.

Sources:

• https://www.spglobal.com/platts/en/market-insights/latest-news/coal/020620-mopr-could-cause-pjm-capacity-market-pricing-collapse-study
• https://www.spglobal.com/platts/en/market-insights/podcasts/focus/030420-ferc-mopr-clean-energy-subsidies
• https://www.powermag.com/the-significance-of-fercs-recent-pjm-mopr-order-explained/