In Ohio, this past month witnessed the final push by both proponents and opponents of Senate Bill 310 (S.B. 310), a bill that aims to freeze Ohio’s renewable energy and energy efficiency standards. The debate over S.B. 310 has focused primarily on the cost of the standards to consumers and businesses, the degree to which the standards have driven investment in the state, and, to a lesser extent, the environmental benefits of the standards.

Although the future of Ohio’s renewable energy and energy efficiency standards has important implications for the people and businesses in the state, Ohio’s energy future is and will be largely influenced by events outside the state. Events over the past month illustrate this point and provide a useful demonstration that Ohio’s energy landscape is largely driven by outcomes and policies at the regional and federal levels.

Prices from PJM’s Base Residual Auction Increase

In May, the PJM Interconnection (PJM) held its Base Residual Auction (BRA) for the 2017/2018 Delivery Year. The BRA sets prices for wholesale generation capacity resources needed to serve the anticipated load during the delivery year. Auctions are held three years in advance of the targeted delivery years. In addition to one BRA, up to three incremental auctions may be held per delivery year. This cost is typically passed along to consumers in the generation portion of their overall electric bill. The objective of each BRA is to procure reserve capacity for electricity in a lowest-cost manner. This reserve of generating capacity ensures that there are adequate resources to meet system electricity requirements and to prevent brownouts and blackouts. Capacity prices determine roughly 10 to 15 percent of customers’ electric bills. The generation portion of the bill — about half of the total — includes capacity, as well as the energy prices for electricity when it is actually produced.

The results from the auction yielded a price of $120/MW-Day for most of the PJM region, including Ohio. Results from last year’s auction — procuring capacity for the 2016/2017 Delivery Year — provided a capacity price of $59/MW-Day.1 In part, the price jumps may be attributed to new rules restricting imports of electricity from outside PJM and limiting demand-response resources.

In April 2014, the Federal Energy Regulatory Commission (FERC) approved several rule changes that limited capacity imports into PJM. In its filing to FERC, PJM argued that over-commitment of external resources that ultimately cannot be delivered into PJM affects both short-term and long-term reliability by inflating the supply of resources in the BRA.2 Earlier in 2014, FERC had also approved PJM’s proposed rule changes that reduced the volume of limited demand response that could clear in the BRA.3

However, as discussed immediately below, a recent decision by the U.S. Court of Appeals for the D.C. Circuit may render demand response’s future within the PJM uncertain.

D.C. Circuit Court Decision Vacates FERC’s Demand-Response Compensation Rule

On May 23, 2014, the D.C. Circuit vacated FERC’s rule governing demand response in wholesale energy markets.4 The rule, known as “Order 745,” requires regional grid operators, such as PJM, to pay demand-response providers the full locational marginal price (LMP) that is used to compensate generators. Opponents of this rule, primarily electric generators, argued that the FERC rule encroached on the state’s exclusive jurisdiction to regulate the retail market.

In its decision, the Court held that FERC exceeded its Federal Power Act (FPA) jurisdiction over electricity wholesale sales of electricity and intruded impermissibly on retail jurisdiction reserved to states. The Court rejected FERC’s argument that Sections 205 and 206 of the FPA granted the agency authority over demand-response resources in the wholesale market. These sections grant FERC the responsibility of ensuring that “all rules and regulations affecting . . . rates” in connection with the wholesale sale of electric energy are “just and reasonable.” FERC argued that it has jurisdiction over demand response because it “directly affects wholesale rates.” Additionally, the Court found that since FERC had failed to address arguments that the demand-response payments it had authorized were too high, even if FERC had authority to regulate demand response, Order 745 would still be unlawful as “arbitrary and capricious.”

Because Order 745 addressed only demand-response compensation in wholesale energy markets, it is not immediately clear what the opinion’s impact will be to wholesale capacity markets. FirstEnergy has already filed a complaint against PJM to FERC, seeking to bar demand response from the capacity market.5

U.S. EPA Releases Carbon Rules

On June 2, 2014, the U.S. Environmental Protection Agency (EPA) released the much-anticipated Clean Power Proposal, the first plan to reduce carbon pollution from existing power plants, the single largest source of carbon pollution in the United States.6 In part, the rules require that carbon emissions from the power sector be cut by 30 percent nationwide below 2005 levels by 2030.

Ohio will be particularly impacted by the new rules. Ohio's power plants produce more carbon dioxide than power plants in all but four other states, and Ohio generates nearly 70 percent of its energy from coal-fired plants. The proposal could force Ohio's coal-fired power plants to dramatically change the way they operate — for example, by improving efficiency, switching to natural gas or even closing down.

The EPA rules come a little more than a month after the U.S. Supreme Court decision in Environmental Protection Agency v. EME Homer City Generation, which upheld the authority of the EPA to regulate air pollution that crosses state boundaries under the Clean Air Act.7 The 6-2 ruling may also be a signal that the EPA’s efforts to use the Clean Air Act to fight global warming could withstand legal challenges.