Ontario and Alberta are in the midst of undertaking reforms to their electricity market structure to introduce new capacity auction processes. To this end, policy-makers are actively trying to strike an appropriate balance between government policy objectives and procuring capacity at a reasonable cost and in a technology neutral manner. A June 29, 2018 ruling by the U.S. Federal Energy Regulatory Commission ("FERC") is instructive for policy-makers and market participants in Ontario and Alberta in highlighting some of the challenges that lie ahead. The FERC issued a 3-2 order declaring PJM’s capacity market structure “unjust and unreasonable”, as encapsulated in the following remarks:
"Over the last few years, the integrity and effectiveness of the capacity market administered by PJM Interconnection, L.L.C. (PJM) have become untenably threatened by out-of-market payments provided or required by certain states for the purpose of supporting the entry or continued operation of preferred generation resources that may not otherwise be able to succeed in a competitive wholesale capacity market. The amount and type of generation resources receiving such out-of-market support has increased substantially. What started as limited support primarily for relatively small renewable resources has evolved into support for thousands of megawatts (MWs) of resources ranging from small solar and wind facilities to large nuclear plants. As existing state programs providing out-of-market payments continue to grow, more states in the PJM region are considering providing more support to even more resources, based on an ever-widening scope of justifications.
These subsidies enable subsidized resources to have a suppressive effect on the price of capacity procured by PJM through its capacity market, called the Reliability Pricing Model (RPM). Out-of-market payments, whether made or directed by a state, allow the supported resources to reduce the price of their offers into capacity auctions below the price at which they otherwise would offer absent the payments, causing lower auction clearing prices. As the auction price is suppressed in this market, more generation resources lose needed revenues, increasing pressure on states to provide out-of-market support to yet more generation resources that states prefer, for policy reasons, to enter the market or remain in operation. With each such subsidy, the market becomes less grounded in fundamental principles of supply and demand."1
At issue before the FERC was a complaint filed by Calpine Corporation in 2016, joined by additional generators, together with a proposal brought by PJM to revise its tariff to address certain price-suppressing effects of state sponsored "out-of-market" support for certain resources.
In essence, the case pitted certain out-of-market payments generated by state policies (intended to address various policy objectives, such as reduced greenhouse gas emissions or the preservation of nuclear power plants), on the one hand, against the ability of PJM to preserve the integrity of its capacity market by imposing a Minimum Offer Price Rule ("MOPR") on new, natural gas-fired generators, on the other.
MOPR was originally conceived by PJM as a mechanism to deter the exercise of buyer-side market power, but its role subsequently expanded to also address the capacity market impact of potential out-of-market state revenues for new, natural gas-fired resources. However, because the PJM MOPR only applied to a single new generation resource, FERC determined that "it fails to mitigate price distortions caused by out-of-market support granted to other types of new entrants or to existing capacity resources of any type."2
FERC granted the Calpine complaint, in part. However, it rejected the solution to amend the PJM tariff as offered by both Calpine and by PJM, and instead launched a new consolidated proceeding to consider modifications to PJM’s MOPR such that it:
"would (i) modify PJM’s MOPR such that it would apply to new and existing resources that receive out-of-market payments, regardless of resource type, but would include few to no exemptions; and (ii) in order to accommodate state policy decisions and allow resources that receive out-of-market support to remain online, establish an option in the Tariff that would allow, on a resource-specific basis, resources receiving out-of-market support to choose to be removed from the PJM capacity market, along with a commensurate amount of load, for some period of time."
The FERC order is interesting not just for the findings of the three-member majority, but also the two strong dissents by Commissioners LaFleur and Glick. Finally, the strong standalone endorsement by Commissioner Powelson is notable, given the June 28 announcement of his intention to leave his position at FERC in mid-August.
This most recent FERC order is just the latest in a line of more than 260 decisions since 1999 relating to capacity markets in NYISO, PJM, ISO-NE and MISO. U.S. capacity markets are the subject of frequent litigation and BLG routinely monitors these decisions and will report on developments that have direct relevance to Canadian efforts.