By Miles Farmer and Amanda Levin

PJM is lagging other regions in addressing carbon emissions and has added significantly more fossil generation than any other grid operator in the U.S. In a recent analysis, we argued that PJM’s market design plays an important role in the build-out of fossil-fueled power plants, and market reform is needed for the cleaner energy future that states and customers in the RTO demand.

Steve Huntoon’s response (See Counterflow: Scary Wrong.) is a collection of distractions from our central concern: PJM’s gas boom will break the “carbon budget” for the region, making it impossible to reach emissions goals. Market structures are a significant factor in determining the energy mix and investments made in a region. PJM’s capacity market, in particular, is built around the characteristics of fossil-fired plants, procures too much capacity and blunts market signals that could drive the expansion of clean energy resources such as wind and solar.

Gas Won’t Save Us

Huntoon suggests that coal-to-gas switching must continue. This is not a climate solution for the region: Retiring coal must be replaced with zero-emission energy sources. Simply replacing remaining coal with gas will not extend the emission reductions PJM has achieved in the past decade. Even as coal-fired power continued to decline last year, carbon pollution in the region (and nationwide) increased year over year in 2018 as natural gas consumption and generation reached new highs. This is projected to continue in the U.S. government’s own most recent energy outlooks. (See the Energy Information Administration’s 2019 Annual Energy Outlook.) Even as coal retires across PJM, emissions in the region will plateau in the coming years under a business-as-usual, high-natural-gas scenario.

This is not a climate-safe future. While the reductions PJM has achieved so far from coal-to-gas switching are roughly consistent with a 1.5 or 2-degree Celsius warming trajectory, they will not continue without focused efforts to deploy zero-carbon resources.

PJM’s market has worked well for gas but poorly for other technologies. A new formula is needed to push the region past gas and achieve reductions in line with a net-zero future.

PJM’s Capacity Market is Flawed

Many factors influence a region’s energy mix, including market rules, as well as state policies and renewable resource potential (i.e. how strong the winds are or how often and powerful the sun shines). We agree with Huntoon that other RTOs, like ERCOT in Texas, were dealt a better hand to play than PJM when it comes to renewable resource quality. Even so, it is clear that PJM’s capacity market design over-procures fossil capacity and blunts clean energy investment.

As we explained in our article, PJM is procuring vastly more capacity than reliability regulators have deemed necessary to keep the lights on.

One reason for this is that PJM has failed to implement a seasonal market and thereby fails to fully leverage resources like demand response, solar and wind. Aggregation fails to address the real issue that the region has different needs in summer and winter.

Huntoon contends that prices would be the same in any case, as “there is no free lunch.” But PJM’s current construct essentially forces all customers to buy a heaping dinner portion even at breakfast time, when they aren’t very hungry, and makes it very costly for chefs to include any menu options other than foods that can be served for both meals. The Brattle Group estimated that separate procurement periods would push costs down by roughly $100 million to $600 million per year.

In addressing our point that PJM’s over-procurement has been costly to customers, Huntoon proposes his own free lunch, contending that our simple intuition that buying more stuff costs more money “profoundly misunderstands” the capacity market. His logic on this point is circular. Huntoon explains that if capacity suppliers had offered higher prices (high enough that PJM wouldn’t want to over-procure supply), costs would have been higher.

This is a faulty counterfactual. If PJM were to just procure the capacity necessary to serve a lower reserve margin (and then stop procuring additional “low-cost” capacity that has bid in), the market would actually see lower clearing prices. Our point is not that PJM should switch to a vertical demand curve (which has other downsides), but rather that after procuring significantly more than its target year after year after year, it is clear that PJM has based its demand curve on erroneous inputs and the overall market construct needs to be reassessed.

PJM’s unwillingness to leverage seasonal resources and persistent over-procurement mean more money is gained from the region’s capacity markets, distorting energy and ancillary markets. Unlike in the rest of the country, renewable resources are largely excluded from resource adequacy planning and are left to compete against heavily subsidized fossil fuel plants in energy markets. In contrast to PJM’s capacity market, wind and solar resources compete in the energy and ancillary services markets on equal footing, as those markets are not defined by administrative criteria.

PJM Can Change Course

Fighting climate change will not be easy. Large, integrated, efficient markets are an essential tool in this fight. But those markets must not create barriers to clean resources or climate policy. Critically, those markets must not be dominated by administrative constructs where incumbent market participants fight over hidden subsidies and create barriers to competition.

Highlighting the consequences of overbuilding gas does not ignore that the region has not been blessed with the same renewable resources as other areas of the country. PJM’s rules play an important role in determining the future resource mix. The recent leadership change at PJM provides the grid operator with an ideal opportunity to shift course, allowing them to better respond to the demands of customers and states, reverse its trend of capacity over-procurement, and better integrating state clean energy policies into a reliable and clean energy future for the region.

Miles Farmer is a senior attorney and Amanda Levin is a policy analyst in the Climate & Clean Energy Program of the Natural Resources Defense Council.