Guest Essay, by Jay Morrison, VP-Regulatory Issues, National Rural Electric Cooperative Association
On December 19, 2019, the Federal Energy Regulatory Commission issued the most drastic and likely the most destructive order we’ve seen during the long history of litigation over RTO market design. With this order, FERC has completed the transition of PJM’s Reliability Pricing Model from a market to an unrealistic administrative construct.
This order makes it far harder for energy developers to compete for customers based on the value their resources can provide, such as dependability, long-term and medium-term price stability, resilience, and environmental characteristics. It also makes it more difficult for wholesale customers to manage market risks by meeting their own needs and reducing their reliance on third-party providers.
FERC concluded that wholesale customers who purchase or build a resource for those values are “subsidizing” the resource, not paying for a product that meets their needs. FERC has determined that capacity is a non-differentiable commodity product with no value other than its availability. Thus, this order declares all new resources must compete solely on the basis of a single-year, administratively determined bid for a three-year forward capacity commitment.
It is ironic that the commission issued this order just shy of the twentieth anniversary of FERC’s Order 2000. On the cusp of a new century, FERC then predicted that RTOs would offer “more efficient planning for transmission and generation investment, increased coordination among state regulatory agencies . . . [and] facilitation of the development of environmentally preferred generation in states with retail access programs.”
This order veers a hundred and eighty degrees from that vision by:
Hamstringing planning by wholesale customers by imposing a huge market-risk premium on those who choose to plan and acquire a portfolio of resources instead of relying solely on an annual market for a standardized short-term capacity product;
Rejecting coordination among state regulatory agencies by declaring their policy goals illegitimate and “out-of-market;” and
Slowing the development of renewable energy by making it far more difficult for new generation to get capacity credit.
The industry has been nearly unanimous in its condemnation of the order. We’ve joined that outcry because electric cooperatives are built by and belong to the communities they serve. This heightened community focus enables co-ops to operate in the best interest of their consumer-members as they work to ensure responsible, affordable and reliable power. FERC’s recent order on PJM’s Minimum Offer Price Rule undermines these principles.
Under the new FERC mandate, if an electric co-op invests in new generation, storage, or efficiency resources to meet its members’ needs, PJM, not the co-op, will decide the “correct” price for the co-op to offer these resources into PJM’s capacity market auction.
This turns the concept of competition on its head. Co-ops aren’t building or contracting for resources to “compete” in the market. Co-ops acquire capacity to meet their members’ needs because the product sold in the RTO’s centralized auction doesn’t satisfy all of the co-op’s requirements.
Yet, if a co-op’s new resource doesn’t clear PJM’s auction, the co-op will not receive credit toward meeting its share of the region’s capacity needs. This will force the co-op to pay twice for capacity, once for the product that best serves the interests of the co-op’s members, and again for the product the RTO concludes the co-op should purchase instead.
NRECA has filed a request for clarification and rehearing of FERC’s order, arguing that a co-op’s decision to self-supply capacity to meet its consumer-members’ needs is consistent with competitive wholesale markets. We hope the commission will heed the numerous comments contrary to its order and once again design markets to serve the needs of consumers rather than forcing consumers to change their business models to meet the needs of a narrowly-focused administrative construct.