Thread by @AriPeskoe

It appears that tomorrow FERC will finally issue its order on the PJM capacity auction (aka Reliability Pricing Model or RPM) and state energy policies. A recap of the key decision points:

BACKGROUND: In 2006, FERC approved the creation of the RPM via a settlement process. Through an annual auction PJM procures sufficient resources (generation, demand response, energy efficiency) to meet its estimate of peak demand 3 years from the auction.

In the 2006 proceeding, parties argued that new entry will “face the possible suppression of prices through buyer actions, such as the decision of states to mandate new reliability projects that could reduce clearing prices to zero.” elibrary.ferc.gov/idmws/common/o…

And thus the Minimum Offer Price Rule (MOPR) was born - If the offer of a net buyer falls below certain levels, and if its net purchases exceed certain levels, and if it does not convince the IMM that the offer is cost-justified, the IMM may establish an alternative higher bid.

In 2011, FERC agreed with PJM that “wind and solar resources are a poor choice if a developer’s primary purpose is to suppress capacity market prices” and did not extend the MOPR to intermittent resources. elibrary.ferc.gov/idmws/common/o…

FERC also recognized in 2011 that RPM has no feature to explicitly recognize…environmental or technological goals” and invited PJM to file a proposal that “reflects broader objectives.”

In 2014, the 3rd Circuit upheld FERC’s approval of the MOPR, and in particular FERC’s decision to initially exempt state-sponsored resources (then gas plants in NJ+MD) and then rescind that exemption, although it chastised FERC for changing its mind - ferc.gov/legal/court-ca…

In 2016, generators urged MOPR expansion “to address the emerging threat of subsidized existing units.” They were focused on OH subsidies and later shifted to IL ZECs. Their bottom line: state subsidies reduce prices paid to us. elibrary.ferc.gov/idmws/file_lis…

TOMORROW: The scope of the MOPR is the key issue FERC will decide. The MOPR currently applies only to certain new natural gas plants. pjm.com/-/media/commit…

In its June 2018 order rejecting PJM’s initial proposals to expand the MOPR, FERC proposed that a new MOPR “cover out-of-market support to all new and existing resources, regardless of resource type.” The order specifies that relevant out-of-market support comes from states.

In general, resources are expected to offer based on their going-forward costs – i.e., the revenue they need to stay open minus expected revenue earned from other PJM markets (energy and ancillary services). Non-PJM revenue changes that calculation.

Decision 1: How to define “out-of-market support”? PJM proposed it mean payments from a non-fed government entity or payments obtained through state-sponsored or state-mandated processes connected to construction or operation of any resource.

What about RECs? Some RECs are sold to utilities for RPS compliance. Those would qualify as out-of-market support under PJM’s definition. But many RECs are sold outside of state processes for green marketing or other purposes. How to distinguish?

Should FERC treat non-compliance RECs the same way it would treat coal ash? Both are non-PJM products that some plants are able to produce. Should FERC assume that REC sales are competitive and therefore consistent with RPM? Is "competitiveness" even relevant?

What about Dominion? Before it builds new generation, it gets a guaranteed return it from state regulators. What about the OVEC plants? Utilities that share in the costs of the plants recover those expenses through retail rates.

What about state economic development incentives? PJM proposed to exclude them, but in practice they’re a subsidy for new natural gas plants.

Decision 2: Once out-of-market support is defined, how will PJM adjust offers from such resources? Adjusted offers might be so high that they effectively prevent all MOPR’d resources from clearing. Or, maybe some adjusted offers will still clear.

Decision 3: Will FERC allow MOPR’d resources to exit the capacity auction with a commensurate amount of load? In the June 2018 order, FERC proposed to allow, for example, a 1,000 MW nuke that receives state support exit the auction along with 1,000 MW (roughly) of load.

The effect is to reduce demand in the market, which reduces the amount of supply that clears. That shrinks the total size of the market. Merchant gens argue this resource-specific exit recreates the initial price suppression problem that we started with.

Decision 4: If FERC does allow the resource-specific carve out, how will be it be implemented? Sub-Qs include – how to calculate quantity of matching load (include reserves?)? Who decides whose load (utilities or competitive retailers)?

Decision 5: Will FERC dictate the actual tariff provisions? If it does not, then tomorrow's order will set up another proceeding about how to implement FERC's guidance.

Here is a thread from last year highlighting parties' comments

https://twitter.com/AriPeskoe/status/1046838964416647168

Our initial comment arguing that generation procurement is a program of cooperative federalism eelp.law.harvard.edu/wp-content/upl…

Our reply to absurd claims of stranded costs eelp.law.harvard.edu/wp-content/upl…