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Proposed changes to PJM’s energy pricing system could reward coal and nuclear plants in Ohio and elsewhere in the region while making consumers pay more, claim critics.
Among other things, the plan would let inflexible electricity generators take part in the process that sets electricity prices.
PJM vice president Stu Bresler said the plan described in the grid operator’s November 15 report was in the works well before the Department of Energy proposed rules to guarantee cost recovery for coal and nuclear plants in the PJM region and certain other competitive markets. Discussions go back as far as June, he noted.
Nonetheless, on November 7, PJM suggested to federal regulators that its own plan would be a more competitive alternative to the DOE proposal. Environmental advocates oppose the DOE proposal and also say that PJM’s plan would raise costs, reduce flexibility and send the wrong economic signals.
“This proposal is designed to prop up dirty, uneconomic, inflexible coal and nuclear generators at the expense of ratepayers,” said Justin Vickers at the Environmental Law & Policy Center.
PJM’s pricing shifts
PJM’s plan would basically let coal and nuclear power plants take part in the process for setting the price of electricity in the wholesale market. That’s something they’re not currently allowed to do because they can’t ramp up quickly and generally must produce large chunks of electricity, rather than incremental amounts.
For the last couple of decades, PJM has used a formula that looks at both where a resource is and what its costs are for supplying increments of electricity needed in the region. However, the PJM report noted, some generation resources, such as wind, can now have a zero marginal cost. Also, as the price of natural gas has come down, plants that use it for fuel have had lower marginal costs as well.
That has led to large baseload power plants not being able to recover their costs, which often include large fixed costs, the report said. PJM has paid so-called uplift charges in order to keep those plants from operating at a loss, Bresler said.
Promoting flexibility?
As a result, Bresler said, “resources that present inflexibilities to the system have really an incentive to make themselves as inflexible as possible but still get committed” to supply some electricity through PJM’s capacity auctions. Letting those large plants take part in setting prices “will provide better incentives… for resources to make themselves more flexible instead of less,” he added.
Bresler did not explain just how a large coal or nuclear plant would make itself more or less inflexible for purposes of PJM’s current price-setting rules. But he did express the view that the new pricing plan would be “more reflective of all the costs that are necessary to serve the demands on the system.”
“We don’t think that PJM is making changes that are consistent with basic economic theory,” said Jennifer Chen at the Natural Resources Defense Council. “It’s going to cost the consumers for no real benefit.”
Indeed, Bresler admitted, “energy market prices, we expect, will go up by some amount.” Increases in the energy prices would be partly offset by an anticipated reduction in capacity prices. But the net result would still be an increase of about 2 to 5 percent, he said.
Bresler suggested that those higher prices could actually increase flexibility in the grid system, because renewable generators or natural-gas plants could get paid more. “Flexible resources will actually be able to do better from the standpoint of the revenue they can achieve from the energy market than they could do if they made themselves inflexible,” he said.
Sending the wrong signal?
Chen said the current system already values flexible resources by letting generators who can meet incremental amounts of demand be the ones who set the price. Higher prices would encourage inefficient plants to stay in the market longer and lead to inefficient results, she continued.
PJM already has about 24 percent more electricity capacity in its reserve than the region is expected to need, Chen added. “If PJM artificially inflates the prices, that could attract new generation, and even more generation coming online would exacerbate the oversupply problem,” she said.
Scott Blake, a spokesman at American Electric Power said the PJM plan is still in “early draft form, and we will be actively involved in the stakeholder process.”
“We will perform our own analysis to determine what provides the most benefit to our customers. Part of this will include determining the impact on the availability of generation resources of all types.”
The Office of the Ohio Consumers Counsel is also in the process of reviewing the report and “will be developing our viewpoints over time,” said spokesperson Molly McGuire.
An alternative?
Bresler said the grid operator’s proposal is intended to be “agnostic” about the type of energy used to make electricity. Yet PJM alluded to the report in its comments on the Department of Energy’s proposed rules to guarantee cost recovery for coal and nuclear plants, and claimed its approach would be more competitive.
“Admittedly, PJM’s contemplated price formation reforms will not ‘save’ all uneconomic or obsolete resources,” PJM said in reply comments filed with the Federal Energy Regulatory Commission, “but they do promise to more appropriately compensate otherwise economic and viable resources of all types whose contributions today to resilience and fuel security may not be sufficiently recognized in the market.”
“The fact that some plants are uneconomic does not call into question the fundamentals of PJM markets,” Joseph Bowring, PJM’s independent market monitor, told FERC in his own reply comments.
Meanwhile, FirstEnergy’s reply comments to FERC claimed the PJM plan would be “too little too late and will not solve the immediate and pressing problem of generation retirements.”
It’s not the last word yet on either the PJM proposal or DOE’s pending subsidy rule. PJM’s changes won’t take effect until more specific rules are drafted, adopted and approved. That process could well take until next fall, Bresler said.
Beyond that, FERC approval of that plan or of DOE’s proposed rules could well be challenged in court, with or without a stay during the litigation. Grounds could include arguments that either the grid operator’s or DOE’s proposed changes are arbitrary, capricious, unreasonable, discriminatory or otherwise unlawful.