How FERC’s flawed definition of “subsidy” could reshape the energy future for 65 million Americans

The Federal Energy Regulatory Commission issued an order last December that could force many clean energy resources to bid into the nation’s largest wholesale electricity market, PJM, at artificially high prices. State policy makers, consumer and environmental advocates and the clean energy industry alike spoke out in vigorous opposition. Now, that order is being challenged in the courts. In the meantime, PJM must implement its directives in a process that will shape the future energy system for 65 million Americans in a region that spans 13 mid-Atlantic states and the District of Columbia.

While FERC’s December order was already bad policy — replacing competitive bidding with administrative pricing — many aspects of their mid-April order clarifying that policy are illogical and unworkable. As well as threatening competitive markets, these orders undermine state clean energy choices and, if FERC ignores PJM’s latest proposal attempting to soften the impact of the orders, could increase customer costs by billions.

The problem with FERC’s definition of ‘subsidy’

FERC’s orders aim to reshape PJM’s capacity market, which pays generators that commit, in advance, to provide power during times of peak electricity demand. Also known as the Minimum Offer Price Rule, these orders set minimum allowed bid prices for capacity resources that FERC deems recipients of “state subsidies,” on the grounds that the bids of these resources lower final auction prices.

This covers programs in many PJM states that have set aggressive clean energy targets. Renewable resources with minimal marginal costs (like wind and solar) have typically bid low, guaranteeing that they clear the auction. While FERC’s December order exempts some existing resources, the new price floors threaten to prevent new clean resources from clearing the market. Offshore wind and storage plants will almost certainly not clear.

FERC’s April order goes far beyond reversing the effects of state incentive programs, however. It expands the definition of “state subsidy” to cover certain types of normal commercial activity. If we take FERC’s vague and sweeping definition of “state subsidy” literally, it could require that MOPR price floors apply to all capacity market resources.

For example, in the April order, FERC declared that the auctions run by many states to procure power for utility customers confer a subsidy on the resources used to supply that service, even if (as is the case) those auctions are fully competitive and run without preference for any resource type.

This is not a minor matter; at least six PJM states hold these “default service” auctions, with several using them to acquire more than 60% of the power used by their retail customers.

This quickly leads down a rabbit hole: While the winning suppliers in these auctions use various mechanisms to acquire the power that ultimately serves homes and businesses in this region, these are all financial transactions and, as such, are settled in the PJM markets. For example, if a power supplier affiliated with a generation owner wins a contract for a tranche of 50 megawatts in a state auction, they don’t specify which of their diverse 2,000 MW portfolio is used to supply it. The generator sells into PJM’s market and the supplier pays PJM for the load used by the utility customers. Since it’s physically impossible to track an electron from its point of sale to its point of use, FERC’s broad definition of a ‘subsidy’ implies that all capacity resources clearing the energy market would be considered subsidized. While it’s hard to imagine this being implemented, it would mean that all capacity market bids would be set by administrative pricing. In taking this measure, FERC stepped far beyond all legitimate authority they have to regulate wholesale prices.

The road ahead

PJM has been forced into the position of attempting to fashion a treatment of state auctions that protects their ongoing activity while somehow still adhering to FERC’s orders. In its latest filing at FERC, EDF highlighted challenges like this and offered a practical process to bring certainty to FERC’s unwieldy state subsidy definition. It remains to be seen if FERC will step back from its state auction decision or continue to impose illogically broad policies and leave it to PJM and the states to pick up the pieces.

While EDF and clean energy advocates are working toward overturning the MOPR in the courts, PJM states with ambitious clean energy goals are under pressure to counteract the impact of the MOPR. This is of particular concern in New Jersey and Maryland, which have between them nearly 9 MW of planned offshore wind.

One option open to states is to require their utilities to withdraw from PJM’s capacity market. As EDF explained in its recent comments to the New Jersey Board of Public Utilities, however, this route is fraught. The withdrawing states would lose the efficiencies of a large central market, as well as PJM’s monitoring and enforcement of penalties for market manipulation.

The current MOPR conflict is a critical battle, but we shouldn’t allow it to serve as a distraction from our even larger goal: well-designed, competitive markets that lower customer prices, internalize the cost of carbon and other pollutants, and reward clean energy innovation. The first steps toward these goals are incremental improvements to the existing capacity market pursued through the stakeholder process at PJM. Over the longer term, a fundamental rethinking of wholesale markets is needed to prepare for high levels of variable renewables and the resources that support them, like energy storage and demand response.