Do Competitive Electricity Markets Support Competitive Generator Exits?
May 9, 2018
On April 30, 2018, PJM Interconnection, L.L.C. (“PJM”) proposed new stakeholder discussions that will continue a complex debate on how competitive electricity markets will continue to support competitive exit, as well as competitive entry, of generation assets. PJM will be analyzing fuel security vulnerabilities to establish criteria in order to assess areas in the PJM system that could face future fuel security issues. The outcome of PJM’s analysis may impact the economic viability of existing coal and/or nuclear fueled generation assets in its competitive wholesale energy markets.
One of the foundational principles for the Federal Energy Regulatory Commission (“FERC”) in establishing competitive wholesale electricity markets has been to ensure that competitive generation resources can enter energy markets in a non-discriminatory manner in order to compete with existing generation. An essential economic corollary to ensuring such “competitive entry” rights is the need for wholesale markets to facilitate the “competitive exit” of non-economic generation resources. FERC is currently wrestling with the need for competitive exits as part of its analysis of resiliency at Regional Transmission Organizations (“RTOs”).
FERC has historically focused on ensuring that new generation resources, particularly from independent power producers (“IPPs”), were able to viably compete with existing generation to meet electricity demand. For example, as early as July 11, 1994, in the Stranded Cost NOPR, FERC announced that “Our goal is to facilitate the development of competitively priced generation supply options, and to ensure that wholesale purchasers of electric energy can reach alternative power suppliers and vice versa.”
FERC’s competitive entry provisions have been very successful in encouraging IPPs, for example, to develop, interconnect and operate new generation assets. In many cases these entering generation facilities have directly competed with existing generation, which is frequently owned and operated by traditional investor owned utilities. For example, between 2007 and 2015, the PJM Independent Market Monitor (“IMM”) reported that 15,318 MWs in additional internal generation had been added to the PJM region.
Until recently, it appeared that FERC’s competitive exit provisions were also working as intended. The IMM reported in 2017 that 28,207 MWs of internal generation capacity facilities (many of which were coal-powered electricity generation facilities) had exited the PJM region between 2007 and 2015.
The competitive exit of generation capacity resources from PJM has been orderly and consistent with competitive wholesale market principles that favor “least-cost” dispatch of generation resources. (This basic operating principle encourages PJM to dispatch generation resources in economic order whenever possible, so that that resources with the lowest costs are dispatched before higher cost generation are dispatched). During the period between 2007 and 2015, PJM’s net decrease in capacity was mostly offset in the PJM capacity market by over 10,000 MWs of new demand response resources and energy efficiency resources, according to the IMM. In addition, when capacity imports and exports (and the integration of new zones) are considered, PJM’s capacity resources actually increased by 19,439.8 MW between the 2007 and 2017, despite the retirement of large quantities of higher-cost generation facilities.
On September 29, 2017, the Department of Energy (“DOE”) issued a notice to FERC that it was concerned that the departure of coal and nuclear-powered generation facilities was contrary to the principle of “resiliency”. The DOE defined the term “resiliency”, in part, to refer to a generation facility that had a 90-day or more fuel supply “on site”. The DOE appeared to be focused on avoiding the competitive exit on coal and nuclear-powered facilities, particularly from Regional Transmission Organizations (“RTOs”), such as PJM. FERC initiated a proceeding in Docket No. RM18-1-000 to consider the DOE’s concerns.
On January 8, 2018, FERC terminated that rulemaking by determining that the record in that proceeding had not satisfied the threshold statutory requirement of demonstrating that the RTO tariffs are unjust and unreasonable. Instead, FERC initiated a new proceeding, Docket No. AD18-7-000, to explore resilience issues in the RTOs. FERC requested that RTO’s respond to a series of questions regarding the alleged premature retirement of generation facilities. FERC requested that RTOs also attempt to define the resiliency of their RTO and to suggest potential ways to improve resiliency.
PJM’s March 8, 2018 response to the new FERC proceeding emphasized that it believes that its generation supply is “resilient”, in part, because it has relatively balanced percentages of nuclear, coal, gas-fired and renewable generation resources. PJM also pointed out that some generation facilities might be favorably impacted by a series of “pricing reformation” proposals. These pricing reforms would “appropriately value all resources that are needed to meet load and respond to PJM operator directions.” One of these proposed PJM tariff changes, for example, would permit “fixed offer” facilities (e.g., coal and nuclear plants) to participate in setting locational marginal prices.
One of PJM’s goals in its newest stakeholder proceeding is to promote competition among different resource types to meet any fuel security needs in a particular location. PJM proposes to price the concept of “fuel security” into its existing market mechanisms. This work is a continuation of PJM’s efforts to preventing a “heavy reliance on one resource type”, which might raise potential resilience risks.
The new PJM stakeholder discussions may extend for many months, and it is unclear whether PJM’s price reformation proposals (and/or its plans to avoid “heavy reliance” on certain capacity resources) ultimately will be approved by FERC. It is likely, however, that stakeholder support or opposition for such initiatives will be important in influencing FERC’s determination whether such tariff changes are “just and reasonable” under the Federal Power Act.
This Eckert Seamans Energy Blog is intended to keep readers current on matters affecting businesses and is not intended to be legal advice. If you have any questions, please contact Rick Drom at (202) 659-6645 – rdrom@eckertseamans.com, or Charles Zdebski at (202) 659-6605 – czdebski@eckertseanans.com.