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The $2.5 Billion Question Waiting at FERC

, Senior energy analyst | August 26, 2019, 4:06 pm EST
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The electricity industry is watching closely for news that will raise consumer costs some $2.5 billion per year.  The Federal Energy Regulatory Commission is expected to change the payments for new and old power plants in 13 states. This decision has been delayed a year, by the resignation of a commissioner leaving FERC split, and has an added feature: it tramples on state policies and prerogatives. (I’ll list those states and policies later.)

Changes proposed by PJM

States where PJM seeks to increase customer costs and discredit utility and energy policies. Credit: PJM

The grid operator PJM runs the largest US electricity market affecting one-fifth of the population. PJM argued that a variety of state practices and policies established to fund power plants, some old and some new, conflict with and corrupt the market it has set up to create competition.  PJM proposed to change the prices bid in its market for plants with some kinds of subsidy payments. UCS and others argued that the subsidies are widespread throughout the energy industry, but PJM declared to FERC that it would decide which subsidies are bad and which are good.

FERC action in 2018

In June 2018, FERC decided that PJM’s existing rules for its capacity market are unjust and unreasonable.  FERC rejected PJM’s distinctions that would protect some resources receiving state support from others that receive state support, saying that there is no evidence showing a difference in impact on market price interference.  FERC ordered PJM to include all resources receiving state support in its proposed price-adjustment practice. FERC Commissioner Robert Powelson, a supporter of markets appointed by Donald Trump, resigned the same day.

The cost of excluding state policies

While FERC tried to soften the blow on consumers and make some accommodation for state policies, the cost of this decision will clearly be in the billions of dollars. In the previous annual running of this auction, payments to generators from consumers was $9.3 billion.  In anticipation of a ruling from FERC to get the market started again, one investment bank advisory suggests that the total increase from the repricing rules will be 30% higher prices. This would translate to a cost impact over $2.5 billion per year from consumers.  All sorts of critical issues are not yet known about the power supply once this rule is adopted, (not to mention court challenges).

More controversy

I’ve written about states’ policy-making and reliability goals coming into conflict with PJM’s initiatives to run a market with incomplete products, PJM’s continuous opening and patching loopholes, and inconsistent approaches to reliability.  Also I wrote about the absence of leadership and PJM’s shared authority with state and federal governments on what turned out to be the day PJM announced a management shakeup.

Will FERC let PJM select subsidies?

In the anticipated decision, FERC will resolve the central question: which subsidies will be penalized by PJM and which will be allowed. PJM had proposed to safeguard from its repricing practice a list of support payments, tax advantages, and subsidies which are predominantly used for fossil fuel plants.  PJM also hoped to include in that protection from competition the plants that are owned by a utility that has state-monopoly protection and revenues to supply its customers.  Whether that category is protected from repricing will be critical to the challenges to this decision. FERC earlier noted the argument that those plants, with state-set rates paying the plant owner, also interfere with market prices.

FERC said no state policy supports

FERC’s order in June 2018 excluded all resources receiving state supports, apparently removing from competition many nuclear plants, many renewables, coal plants receiving state bailouts, and any plant in a utility rate charged to consumers. (This is not a comprehensive list).

The states with policies supporting old or new power plants:

  • Renewable Energy Standard: DC, DE, IL, IN, MD, MI, NC, NJ, OH, PA, VA (These add up to approximately 25,000 MW of wind and 12,000 MW of solar resources, by PJM estimates.)
  • Offshore wind commitments: NJ, MD, VA (6,700 MW)
  • Nuclear support: IL, NJ, OH (6,900 MW)
  • Coal support: OH, PA, WV (Policies vary)
  • Consumer rates cover costs for utility-owned generation: KY, OH, TN, VA, WV (This is 40,000 MW or roughly 20% of generation in PJM.)
  • PJM-area states with no subsidy to power generators: None

Investor-owned utilities that collect generator costs from consumers under state-set rates:

  • Dominion’s Virginia Electric & Power Co
  • First Energy’s Monongahela Power Co. and Potomac Edison
  • PPL’s Louisville Gas & Electric Co. and Kentucky Utilities Co.
  • AEP’s Appalachian Power Co. (West Va, Va, Tenn.), Kentucky Power Co., Wheeling Power Co., Ohio Power Co. and Indiana Michigan Power Co.

This story is still unfolding. PJM has said during this debate that a new federal payment to favor plants that have fuel on-site (i.e. coal and nuclear) would also be a market interference that will require those plants’ bids to be set higher, too. How states react to PJM’s efforts to raise prices, and counteract the laws enacted by every state in its footprint should be interesting. The leadership change at PJM and a growing realization that our markets are not designed for the needs of a changing energy supply create room for writing another chapter in this story after this one.

Photo: Pictures of Money/Flickr

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