By Rich Heidorn Jr.

WASHINGTON — A top PJM official on Wednesday suggested states embrace carbon pricing rather than exit the RTO’s capacity market in response to FERC’s controversial order expanding the minimum offer price rule (MOPR).

“We’ve had a proposal on our website for two years now [on] how we would implement carbon pricing,” Craig Glazer, PJM vice president of federal government policy and a former Ohio regulator, said during a panel discussion sponsored by research group Resources for the Future (RFF). “We would do it with what I call a ‘coalition of the willing,’ because I don’t necessarily need all 13 states to agree to it. … But we could do this. … We’re anxious to move forward in discussions on that.”

Glazer said carbon pricing “would go a long way” toward addressing state concerns that they could pay twice for capacity — once through PJM’s auction and again through their renewable portfolio standards — under FERC’s Dec. 19 order requiring the RTO to expand the MOPR to all new state-subsidized resources.

Dozens of intervenors Tuesday asked FERC to reconsider or clarify its directive. (See PJM MOPR Rehearing Requests Pour into FERC.)

Calpine, which led the complaint that prompted FERC’s order, has long supported carbon pricing, said Sarah Novosel, the company’s managing counsel and senior vice president of government affairs.

“The states should be able to … lower carbon emissions, but they should do it in a market-friendly way so we can maintain the benefits of the competitive capacity market that we’ve had for the last 20 years,” she said. “It would be such a shame to lose the competitive capacity market because people are upset by this order.”

Novosel acknowledged that the Regional Greenhouse Gas Initiative, which includes Maryland and Delaware in PJM, “doesn’t seem to be doing a whole lot” because its carbon auction prices have been low. “Let’s goose up that price or do some other type of carbon pricing that really puts a meaningful price on carbon. … If you get prices high enough … developers will come in, not with state contracts but because they see the market signal and they’ll develop the types of renewable or low- or zero-emitting generation that’s needed to hit the states’ goals.”

The other two panelists, Analysis Group’s Sue Tierney and Grid Strategies’ Rob Gramlich, also endorsed carbon pricing, but they said they predicted some states will leave the capacity market over the MOPR ruling.

‘FRRexit’

Tierney, who chairs RFF’s board of directors, said FERC’s attempt to protect the capacity market from price suppression from subsidized resources may have, ironically, mortally wounded the construct.

“There are so many states — and perhaps public power entities — who decide that this is not the way they want to go that there will need to be pathways … to figure out how people can exit the capacity market,” she said, noting that CAISO, MISO and SPP leave responsibility for resource adequacy to the states.

“The fact is states and utilities now can — and likely will — pull out of these markets in response. The mechanism is the fixed resource requirement [FRR]. It’s in the Tariff; no further changes need to be made,” said Gramlich, who dubbed the potential exodus “FRRexit.”

“I’ve had incredibly detailed conversations with state legislators about how it could be done,” he added. “They’re thinking about it in Maryland, New Jersey, Illinois. I’m hearing rumblings in Virginia. … A lot of states will say, ‘Screw it. I’m out.’”

Glazer warned that the FRR could be an “incredibly inefficient solution” for the states to meet their resource adequacy needs.

“If I’m in Newark, N.J., for example, wind and solar … resources may be in a neighboring state, may be outside of the FRR zone. So, it certainly would be more costly.”

It could also result in over-procurement that depresses energy market prices, hurting renewables and nuclear generation, he said. “You could feel really good that you can control your destiny, but you may be hurting the very resources you want to attract.”

Don’t Overreact

Glazer said the order, which rejected many of PJM’s “MOPR-Ex” proposals, “might have made the process more administrative, more uncertain, than it needs to be.” But he said the worst-case scenarios are overblown.

“I want to ask that we slow down the hyperbole. This is a serious issue, but I don’t think it is the death knell of renewables or nuclear,” he said. “When you add the existing carveouts that FERC did for renewable portfolios, demand resources, existing public power … I don’t think, in the short run, this is [going to] have quite the impact that people think.”

Glazer said FERC’s ruling on PJM’s fast-start pricing proposal (ER19-2722) — which is listed on Thursday’s open meeting agenda — could improve price formation in the energy market. “If we get energy prices right, we can shrink the capacity market, which is a goal we all should have,” he said.

Tierney was less sanguine. “The idea that we’re going to get more and more revenue from the energy market [is] in some ways a leap of faith,” she said. “We have low natural gas prices; we have more and more of the resources with zero variable costs or very close to zero variable costs.”

She disagreed with the commission majority and fossil generators that the order creates a “neutral playing field,” saying she sides with Commissioner Richard Glick, whose dissent predicted the order will slow the transition to a low-carbon resource base.

She was also critical of PJM and its Independent Market Monitor becoming the “policy police” in determining which resources have received state subsidies and should be subject to the MOPR. “The courts are going to have a field day with figuring out what is a subsidy,” she said.

Glazer said PJM doesn’t welcome the role FERC has given it, saying the RTO is particularly concerned with how it and the IMM will review requests for unit-specific MOPR exemptions. “I could take an uneconomic plant and stretch it over a longer period of time and make it look economic. Or I could do the converse,” he said.

Appellate Review

Gramlich said FERC should issue its order on the rehearing requests quickly so the appellate courts can resolve questions over the ruling’s breadth and application. (See related article, PJM Industrials Challenge MOPR for Voluntary RECs.)

He said he expects the courts to overrule FERC based on the Supreme Court’s 2016 Hughes v. Talen ruling, in which it said Maryland regulators’ attempt to subsidize a combined cycle plant was improper because it was “tethered” to the generator’s participation in the federally regulated capacity market. (See Supreme Court Rejects MD Subsidy for CPV Plant.)

“I think they will look at that and say, ‘Wait a minute, we can’t have reverse tethering either, where FERC gets to directly … target’” state subsidies.

Tierney said FERC’s argument that it “can go after state subsidies but not federal subsidies seems cockamamie.”

Novosel agreed. She said the courts might permit FERC to ignore the federal production tax credit and investment tax credit for renewables. “Where you have direct congressional action, you could say that Congress thought about it. But to say that any federal action was an act of Congress and so we can’t take action against it, I think it could be vulnerable.”