a trio of wind turbines
Credit: Dennis Schroeder / NREL

Sweeping “minimum offer” rule will likely cut into the competitive edge for renewables as a hedge against fossil fuels.

Motions filed this week are asking the Federal Energy Regulatory Commission to change a ruling that could price many renewables out of the PJM capacity market, while driving up prices for consumers.

FERC’s Minimum Offer Price Rule, or MOPR, calls for PJM to set minimum bids for state-subsidized electricity generators in those auctions. The rule could indirectly give coal-fired power plants an extra lease on life in the country’s largest capacity market, while making it harder for new wind or solar plants to enter the market and compete.

“The decision is really the worst case scenario” of possibilities considered during the period leading up to the ruling, said attorney Christie Hicks at the Environmental Defense Fund.

PJM’s capacity auctions pay generators to guarantee they will provide power at a future date, usually about three years out. Lower-priced energy resources clear the auction ahead of higher-priced ones. All who clear get paid the same rate as the highest successful bidder. 

Most coal and natural gas plants in the PJM footprint won’t be subject to the rule, outside of a few that get state subsidies, as under Ohio’s House Bill 6. However, the rule includes indirect benefits from state policies that could be deemed to provide an advantage.

Viewed in that way, renewable portfolio standards would fall under the rule, largely because utilities can meet those standards by buying renewable energy credits, or RECs.

“RECs are simply a form of subsidy,” said Joseph Bowring of Monitoring Analytics, who serves as PJM’s Independent Market Monitor. “So RECs are paying above-market prices for certain attributes.” In his view, FERC’s rule is an “internally consistent, coherent, logical” approach to the relationship of subsidized resources and competitive capacity markets.

Hicks and others disagree. A REC for solar or wind power isn’t a subsidy, but rather compensation for the environmental attribute of being clean, non-polluting energy, she said. By that view, REC payments account for the market’s failure to charge coal and natural gas plants for the pollution they cause.

Analysts don’t yet know what the minimum offer price will be for wind and solar power. Nonetheless, a combination of factors suggests that new, non-grandfathered resources would have a hard time clearing the capacity auction.

Squeezed out

FERC’s rule does provide a categorical exemption for renewable projects that already exist or are in development. In Bowring’s view, that should minimize the impact on renewables. In practice, the exception may be very narrow.

About 8.7 GW of planned renewables appear to be grandfathered, said Eamon Perrel, senior vice president of business development for Apex Clean Energy. Another 92 GW of projects have submitted interconnection requests to PJM and have had millions invested so far. Yet they probably wouldn’t be considered far enough along to fit within the exception, he said. 

And while there would be minimum offers for different types of generators, such as wind or solar, the minimum price would be “based on a proxy unit that doesn’t really have any relationship to whatever your individual costs are,” said Jeff Dennis, managing director and general counsel for Advanced Energy Economy.

Currently, companies’ bids depend on how much revenue they need, considering all other revenue streams, Dennis said. Operators of solar and wind farms generally use long-term power purchase agreements to recover capital costs and profits over an extended time period. So, their capacity auction bids are generally low.

In contrast, the minimum offer for most solar and wind farms subject to the FERC rule would be based on a new plant entering the market. That offer would likely build in capital and construction costs along with other expenses.   

Meanwhile, most coal and natural gas plants could submit bids based on their avoidable costs for staying open. FERC’s rule will create a persistent “bias for current resources versus new entrants” in the market, said Tom Rutigliano, a senior advocate for the Natural Resources Defense Council.

Bowring had pushed to have the minimum offer for all sources under the rule based on net avoidable costs, but FERC rejected that suggestion. If FERC had gone that route, the impact on renewables would be “probably zero,” he said. That’s because “the net avoidable cost of renewables is likely to be zero.”

A second problem for the renewable industry is that the PJM capacity auction already discounts wind and solar resources from their nameplate capacity, on the grounds that those are intermittent resources. Yet the grid operator likely won’t discount its calculations of the total revenue that a wind or solar farm would need to offer that nameplate capacity into the auction. So, those revenue requirements would wind up being spread out over the fraction that winds up being “counted.”

“You’re taking the entire cost of the project, and you’re wedging it into a smaller number of megawatts because of the way PJM discounts the value of renewables,” Dennis said. “It’s a rule that doesn’t reflect the economics of renewable energy.”

Already discounted

Companies shut out of the capacity market would need to make up the revenue somewhere else — possibly through higher prices for long-term power purchase agreements.

A typical wind project might need to increase its 12- to 15-year power purchase agreement price anywhere from $3 to $7 per megawatt-hour, Perrel said. The price for a typical solar project might need to increase by roughly $5 to $9 per MWh. (Companies don’t generally disclose power purchase agreement amounts while deals are in the process of negotiation.)

“You’re looking at a 10% to 20% increase on PPA rates for wind, maybe 15% to 25% for solar,” Perrel said. That shift could make power purchase agreements less attractive to potential customers as a hedge against future changes in prices, he added.

Meanwhile, forcing high minimum bids on wind or solar resources will let more coal and natural gas plants clear the auction than otherwise would be the case, critics say.

“Right now you have renewable energy resources that offer into the capacity market at very low prices,” said Sierra Club attorney Casey Roberts. But remove that competitive pressure, and the supply curve shifts. “A coal plant that may have been on the margin, that may not have cleared, is now more likely to clear,” she said.

PJM’s Jan. 21 filing with FERC also notes that if states procure capacity that doesn’t clear the auction, the grid operator would then need to arrange alternative capacity. “Such a result would clearly be inefficient and detrimental to consumers and, further, is not necessary to ensure an efficient price signal nor a just and reasonable rate,” the filing said.

A shift at FERC

“FERC was designed to be an independent agency that was insulated from the executive branch,” Roberts said. Yet now the December ruling seems poised to indirectly give coal plants at least some of the financial support they had repeatedly sought from the Trump administration.

“I don’t think it’s sunk in just how political this was from FERC,” said Dick Munson, director of Midwest clean energy for the Environmental Defense Fund. Over the years, the commission had been a technical, science-focused institution, he noted.

“But it has been politicized, as much as Washington has been,” Munson said. “And this is clearly a decision to pick technology favorites and advance them.”

Kathi is the author of 25 books and more than 600 articles, and writes often on science and policy issues. In addition to her journalism career, Kathi is an alumna of Harvard Law School and has spent 15 years practicing law. She is a member of the Society of Environmental Journalists and the National Association of Science Writers. Kathi covers the state of Ohio.