Delaware Division of the
Public Advocate

FERC’s capacity markets limit clean energy and cost billions

Date Posted: Friday, August 28th, 2020

The DPA is a party to the Circuit Court appeal of the Federal Energy Regulatory Commission (FERC) decision regarding the capacity market and minimum offer price rule.  Below is an article written by attorneys working with several of us to ensure clean energy can participate in the marketplace.

FERC’s capacity markets limit clean energy and cost billions; it’s time for Congress to act.

The following is a contributed article by Scott Strauss, Jeffrey Schwarz and Peter Hopkins, each a partner at Spiegel & McDiarmid.

While coronavirus dominates the headlines, climate change is not on lockdown and continues to demand our attention.

Recently, the House of Representatives “Select Committee on the Climate Crisis” reported on how to achieve a national net-zero emissions economy by 2050. “Decarbonization” of the electricity sector by 2040 is key to meeting this goal. And presidential candidate Joe Biden has called for even faster sector decarbonization, by 2035.

Ridding the power sector of carbon will require investing billions in new infrastructure. But money alone won’t get a clean generation fleet up and running. Broad federal and state government cooperation is required. That’s not happening now.

Instead, state clean energy programs are being threatened by the actions of a federal regulator — the Federal Energy Regulatory Commission (FERC). If left unchecked, FERC’s efforts will keep older, dirtier fossil‑fueled resources in operation longer while undermining state programs to promote clean renewable energy. And consumers will pay billions in unnecessary charges.

The House report sees the problem and recommends legislation prohibiting FERC from discriminating against or taking actions to “mitigate” the effects of state clean energy policies. And the same FERC actions targeted in the report are also being challenged in federal court. Successfully addressing FERC’s actions is critical to unleashing clean generation development and fighting climate change.

FERC gets in the way

Here’s how FERC has gotten in the way, and why change is needed. Federal law preserves state authority over electric generation. States can procure the clean resources by taxing generators that emit greenhouse gases or by paying generators that don’t do so. States also can build clean generation or require that local utility power supplies increasingly include clean resources.

But the states and the federal government share responsibility for meeting the nation’s electricity needs. Once electricity is generated, it must be transmitted — often over long distances — and sold at wholesale for subsequent resale to homes and businesses. States regulate the first step (generation) and the final step (local distribution). FERC regulates the interstate middle: the transmission and wholesale sale of electric energy from the generator to the local utility.

In years past, there were relatively few wholesale sales because the same utility owned everything — the generators, the transmission lines and the distribution systems. In the last two decades, states across the country have pursued “restructuring” initiatives, requiring utilities to sell their power plants to independent companies that compete to sell power at wholesale to local utilities. To facilitate competition, FERC encouraged the formation of large regional wholesale power markets, which now cover most of the nation. The result: a vastly more significant role for FERC as the wholesale market regulator.

Resources come to markets with their respective disadvantages and advantages, including state support for desired clean resources. Wholesale electric markets are supposed to take supplier costs and revenues into account and to select the lowest cost electricity sources. But, as state programs have grown, FERC has responded by putting its thumb on the scale, treating state-supported generation as a threat that will suppress wholesale prices and undermine competition.

While not blocking state programs outright, FERC has adopted rules that negate the benefits clean resources receive from state programs.

A vital distinction

In regional power markets, bidders vie to supply customers with several products, including electric “capacity” — essentially an option to call for power production when needed. Each resource bids the lowest price at which it is willing to sell. The market operator stacks the bids in price order, and chooses the lowest-priced resources needed to satisfy expected demand. The same price is received by all selected resources, but is set by only one: the bid of the last (and most expensive) resource needed to meet demand.

In picking winners, FERC’s auction looks only at cost — it makes no difference whether the electricity is from a coal plant or a wind farm. For state programs aimed at climate change, however, that distinction is vital.

Where states have adopted programs to pay clean energy providers for their environmental benefits, FERC has responded by requiring those resources to bid into wholesale auctions at minimum prices that ignore the benefits they receive from the states. So while a resource that needs to recover $500 in revenue, and receives $400 in state subsidies, would rationally submit an auction bid of $100, FERC rules require the resource to ignore the $400 subsidy and bid at $500. But no such bid rule applies to resources receiving federal subsidies or the revenue some generators earn by selling byproducts like steam or carbon dioxide.

Well-functioning markets allow consumers to buy the products they value most. But FERC’s minimum bidding rules make it much harder for clean, state‑supported resources to be selected in wholesale auctions.

In much of the nation these auctions are mandatory: consumers must pay for auction‑selected resources. So where FERC bidding rules cause state-sponsored resources to fail to “clear” auctions, consumers must pay twice to meet the same service need: once for the state‑supported generation, and again for the other resource selected in the auction.

These unnecessary double‑charges are estimated to cost consumers billions of dollars each year for decades to come, and may lead some states to abandon their programs.

Far from promoting markets, FERC’s rules nullify the advantages conferred on competitors whose clean resources have won state approval precisely because they provide what citizen-customers want: cleaner supplies to power their futures. Worse, even if states continue to support development of new renewable resources that have been priced out of wholesale auctions, fossil‑fueled resources will continue to clear them and receive auction revenues.

FERC is protecting fossil-fueled generators against their competitive failure to provide clean electricity.

The nation’s largest electricity market is the Pennsylvania‑New Jersey‑Maryland or “PJM” power pool, which serves 65 million customers in 13 states (from New Jersey to North Carolina to Illinois) and the District of Columbia. In December 2019, FERC expanded PJM’s minimum auction bidding requirements to encompass a wider array of resources that receive state (but not federal) support.

The main targets of the expanded rule are renewable generators, including large offshore wind projects, and existing, zero-emission nuclear plants. A combination of states, consumer advocates, public power entities, generators and environmental organizations are challenging FERC’s rule in federal court. Some PJM states have responded to FERC’s new rule by announcing investigations into whether they should exit federally‑regulated markets altogether.

If successful, pending litigation could lift some of the unwarranted federal burdens on state clean energy programs in PJM and other places around the country where states are trying to promote clean energy and FERC is resisting. But a legislative fix would do more, because it would set the rules for the entire country and avoid the risks of case-by-case litigation.

Congress should act on the House report’s recommendation and remove FERC’s misplaced limitations on how state‑sponsored clean resources participate in wholesale markets. Removing those obstacles will go a long way toward determining whether the ambitious House plan — or any similar proposal — will be able to deliver a decarbonized grid and a clean energy economy.