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Protecting power plant owners from clean energy policies may have a perverse result

This article first appeared in Forbes

U.S. electricity markets have long operated under an illusion of being perfectly competitive. Federal and state regulators, power plant owners, and consumer groups all pledge allegiance to the idea that competitive markets will result in fair prices for electricity and fair returns for producers. But the truth is U.S. electricity markets have never met the economic ideal of perfect competition, and now a federal regulatory order may fundamentally reshape the nation’s largest wholesale electricity market in the name of this illusion.

The stakes are high because electricity customers in states with aggressive clean energy targets could see drastically increased costs as a result of the Federal Energy Regulatory Commission’s (FERC) directive to the regional organization that coordinates the movement of wholesale electricity between 13 Eastern and Midwestern states and the District of Columbia, the PJM Interconnection.

Well intentioned policies, if not carefully designed, can lead to perverse outcomes further aggravating underlying problems. Such is the concern in what has become known as the PJM Expanded Minimum Offer Price Rule, FERC’s hotly disputed directive that would prevent state subsidized power plants from offering electricity below a set minimum price in PJM Interconnection’s long-term electricity capacity market. The market is designed to ensure grid reliability through auctions of obligations to deliver power to the regional transmission network three years before it is needed, as well as provide power plant owners with price signals to make sound investment decisions.

In the name of “competitive” markets, FERC (which cites the term seven times in its press release) recently upheld its 2019 order that PJM require minimum bids from state subsidized wind, solar and nuclear power plants. FERC took this action out of concern that subsidized power producers, particularly nuclear power plants receiving newly-created clean energy subsidies, would hurt the returns of non-subsidized power plants. However, the unequal treatment of power plants has always been an inconvenient truth of deregulated electricity markets. Within the very same proceeding, it was noted that over 100 different subsidies currently exist in PJM, including for coal and natural gas power plants. What is new is the scope and magnitude of clean energy subsidies.

The effect of FERC’s directive is that subsidized nuclear and renewable power may be priced out of the PJM long-term capacity marketplace. This creates a problem for PJM states that are committing to a clean energy future, particularly New Jersey, Virginia, and Illinois. New Jersey is committed to 100 percent clean energy usage by 2050, Virginia has just enacted a law to use only renewable energy by 2050, and two bills under serious consideration in Illinois would commit the state to a renewable energy future. These three states are aggressively investing in clean energy. Yet under FERC’s Expanded Minimum Price Offer Rule, clean energy power plants may not be counted towards the regulatory requirement of ensuring grid reliability due to being priced out of the market. This will require customers in these states to buy additional capacity through the PJM marketplace, double paying to satisfy PJM reliability requirements.

How will the conflict be resolved? To prevent a dramatic increase in consumer electricity costs, states with strong clean energy aspirations may pull out of the PJM Interconnection capacity market. New Jersey had threatened to do so in the past, and Ralph Izzo, CEO of PSEG, the state’s largest utility, said on the company’s 4th quarter earnings call that the Expanded Minimum Price Offer Rule, “puts PJM states that want to support clean energy resources on notice that they will need to seek an alternative to the capacity market auction.” Similarly, Illinois’ proposed Clean Energy Jobs Act, once of the two renewable energy bills in the Illinois statehouse, seeks to push Illinois out of the PJM electricity capacity market. If FERC finalizes the Expanded Minimum Price Offer Rule it may very well be the trigger that sets off a rush for the exit.

New Jersey and the Chicagoland region of Illinois account for substantial power demand within the PJM network. If either of these states were to leave, there would be a significant drop in demand and an oversupply of electricity capacity in the regional network that would cause prices to decline. This outcome would harm all remaining power plant owners within the capacity marketplace. The bottom line: FERC’s directive designed to safeguard the competitiveness of the long-term electricity market by shielding natural gas and coal power producers from bidding against subsidized clean energy may very likely hurt investment returns of those natural gas and coal plants remaining in the PJM network, a highly perverse result.

Policy goals have always pervaded our energy markets, and at times weigh directly against each other. Priorities such as reliability and affordability, safety and profitability, and economic growth and environmental responsibility, only begin to scratch the surface of this constant tension. Rule changes inherently disrupt the existing balance of competitive markets, creating new winners and losers in industry.

There is no doubt that we will continue to see states across the U.S. expand pathways towards a cleaner energy future. As we try to balance our “competitive” energy marketplaces with clean energy aspirations, the central question we face is who should shoulder the costs? Calls for enhancing competition typically favor existing power plants owners and calls to maintain the status quo will favor the consumer. If we believe in fair prices for electricity and fair returns for power producers, the reality is everyone will need to shoulder some portion of the costs.

David Cherney is a US energy policy expert at PA Consulting

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  • David Cherney

    David Cherney

    PA energy and utilities expert

    David is a policy expert who navigates regulatory uncertainty to optimize investment value and minimize risk

    Insights by David Cherney

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