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Comments on FERC’s Potential Reforms to PJM Capacity Market

After suggesting that state policies subsidizing clean energy are distorting capacity markets, the Federal Energy Regulatory Commission (FERC) is exploring reforms to the capacity market in PJM – the grid operator serving 13 states and Washington D.C. FERC’s reforms have the potential to undermine state policies that address climate change, such as Renewable Energy Credits and Zero Emissions Credits (we discuss this issue in depth in a recent report).

On October 2, we submitted initial comments to FERC on the proposals.

FERC has proposed two market changes: 1) imposing a minimum price for bids into the capacity market made by generation resources that receive out-of-market payments as a result of state policies, and 2) allowing clean energy generators to sell their capacity to customers outside of the market. However, unless the latter mechanism is properly designed to reduce the level of capacity procured through the market, the minimum price rule will hamper the effectiveness of state programs and lead to increased costs to consumers.

Our comments discuss the design of FERC’s proposals, explaining three primary issues:

1. The expansion of the minimum offer price rule (“MOPR”) to cover payments that resources receive for the economic value of the air pollution emissions that they avoid (“externality payments”) would not be just and reasonable because it would detract from, rather than enhance, market efficiency;

2. Pairing an expanded MOPR with a provision that allows resources subject to the MOPR to exit the capacity market with a commensurate amount of load could address some of the market distortions, but to do so it must align the incentives of capacity and load to participate and it must be designed to address the inefficiencies exacerbated by the MOPR; and,

3. Applying the MOPR to only those resources whose out-of-market revenue is the result of state-directed compensation for the environmental value they provide would be unduly discriminatory because such resources are not meaningfully distinguishable from those that receive other out-of-market revenue; whereas applying the MOPR broadly to all resources that receive any out-of-market revenue could lead to heightened issues of market power and capacity overbuilding.

On November 6, we submitted reply comments addressing proposals from other stakeholders. Our reply comments focus on the importance of efficient price signals and of differentiating between economically efficient low prices and economically inefficient price suppression. We also explain why neither of PJM’s proposals would properly address overprocurement concerns, while they would distort efficient bidding incentives and lead to inefficient market outcomes.