By Rich Heidorn Jr.

WASHINGTON — Arnie Quinn, director of FERC’s Office of Energy Policy and Innovation, had modest hopes for reaching consensus when he moderated a panel on public policy and wholesale markets at the Energy Bar Association’s Mid-Year Energy Forum last week.

The panel included Exelon’s Kathleen Barron, a defender of zero-emission credits for nuclear plants, and NRG Energy’s Peter Fuller, whose company is a harsh critic of the subsidies.

“While I think it might be hard to come up with a consensus about what ultimate landing spot we’d like to get to … at least agreeing on what we’d like to avoid would be helpful,” Quinn said.

Quinn also invoked one unsafe word for the discussion: “MOPR” — minimum offer price rule. “Unfortunately, we’ve got a lot of pending dockets on minimum offer price rules,” Quinn explained.

MOPR was not invoked. But consensus was indeed elusive in the discussion, which included FERC’s May 1-2 technical conference on state policies and wholesale markers and Energy Secretary Rick Perry’s call for price supports for nuclear and coal plants.

‘Modest’ Nuclear Supports

Barron, Exelon’s senior vice president for competitive market policy, defended the ZECs approved in New York and Illinois, saying they had a “quite modest” impact on wholesale markets compared to state renewable energy credits and rate-based generation.

“I think we need to take a step back when we launch this conversation to just recognize that even the Eastern markets are not free of intervention,” she said. “By 2025, about 30% of the generation in PJM will either be rate-based — through state cost-of-service regulation — public power or [renewable portfolio standard] programs,” she said.

Even if all of PJM’s nuclear generation — currently 19% of the RTO’s capacity mix — were subsidized, she said, it would still have a smaller impact than state RPS goals. “How many renewable resources would they like to have?” she asked. “25%, 30%, 50% by 2030?”

Moreover, while ZECs are worth $17.54/MWh in New York, that is less than the state’s RECs, which run as high as $23.28, she said. Illinois’ ZECs are $16.50/MWh, while their solar RECs are worth more than $200/MWh. And Maryland will pay $132/MWh for offshore wind RECs. “So we’re talking about relatively small amounts compared to other clean generation programs,” she said of ZECs.

‘Four Product’ Future

Despite his company’s opposition to ZECs, Fuller did not contest Barron’s claims. Instead he chose to discuss his company’s “four product” vision of the future: renewables, energy storage, controllable demand and fast-ramping gas.

Fuller said that the Department of Energy’s Notice of Proposed Rulemaking had sparked an “extremely important conversation” and that a role for fuel security is an “option to think about.”

But he added, “The solution set, I think, is much broader than what was in the original notice from DOE.”

In a future dominated by zero- or low-marginal cost future, the LMP markets based on fuel costs “breaks down,” he said. “Are we doing locational marginal pricing right? Are we calculating energy prices right? PJM has a proposal to really look at different eligibility for setting energy prices. That would be an important idea. Clearly we need scarcity pricing everywhere to capture the operational realities of the markets.”

Fuller was the only member of the panel — which included Rob Gramlich, of Grid Strategies, and Potomac Economics’ David Patton, whose firm performs market monitoring for MISO, NYISO, ERCOT and ISO-NE — who did not have FERC tenure on his resume.

‘Wacky’ Federal Initiatives and RTO ‘Mission Creep’

Gramlich, a former senior vice president for government and public affairs for the American Wind Energy Association who now consults for AWEA and other clean energy interests, said the DOE NOPR would “upend 25 years of progress toward competitive markets.”

“We’ve had this conversation many times,” said Gramlich who served as senior economic adviser to FERC Chairman Pat Wood III in 2001-2005. “I think there’s one major thing that’s changed from the previous [discussions]. Usually the context is the wise, well intentioned federal authorities or the RTOs trying to clean up or fix what the wacky states are doing. [Now we’re considering] not only wacky state policies but wacky federal policies and see whether we have a regulatory structure that can withstand that,” he said, sparking laughter. “You might say whether it’s resilient, whether it can withstand and bounce back rapidly from narrow political interventions.”

Gramlich said market interventions have caused “mission creep” for RTOs beyond their traditional roles of running the transmission system and wholesale markets. “I’m frankly concerned that the RTO missions are getting extended well beyond those two core things and that a lot of states and utilities will look at these RTOs and say, ‘I’m out.’ Or, ‘I’m in the West and I was thinking of joining. Now I’m not.’”

Gramlich was skeptical of Perry’s call for compensating generation units for having on-site fuel supplies or providing “essential reliability services.”

“We’re seeing all sorts of interests saying their product or their generation type provides this, that or the other thing to the grid. I’m really relying on FERC here to decide: Is that actually needed? Is that actually a service? And if so, can others provide it as well? And let’s create real competitive markets: define the service and then let any and all bidders bid to provide that service.”

‘Rent-Seeking’

Patton said policymakers face an existential question. “You either believe in markets or not. And if you don’t believe in markets then why are we doing this?” he asked.

“This just becomes a giant rent-seeking exercise. I know when I say that to a room full of lawyers, that doesn’t sound terrible,” he added to laughter.

Patton said FERC deserves blame because it has “never articulated any sort of standard on what a just and reasonable capacity market looks like. The closest they’ve ever come is in New York, saying it’s got to produce a price signal that will be sufficient to get an adequate resource mix.”

He noted that capacity markets incent generation investments that are evaluated over a lifespan of 30 or 40 years.

“If every year or two you have dramatic policy shifts that change fundamentally what people’s expectations are about the market revenues they’re going to get, then you get … the worst-case scenario.

“It’s alarming how many times … new [FERC] commissioners have come in and said, ‘I want to revisit whether capacity markets are a good idea. Let’s have a technical conference and determine whether capacity markets are delivering on their objectives.’ Basically, the subtext is we may do away with these things. And they’re delivering roughly half the revenue that the generation needs to break even on a new investment. … It’s like when Congress says, ‘We may not raise the debt ceiling.’ How do you even say that?”

Patton disputed arguments Perry and others have made in defense of price supports.

“When people tell me we’re overly gas-dependent, we don’t have markets that value fuel diversity, [I say] that’s absolutely not true. When people say we don’t have a market that motivates generators to be available and perform, that’s absolutely not true,” he said. “They’re assertions that support doing something and changing the markets. But if you think about what we’re talking about, if you have good shortage pricing and we’re short somewhere because a gas pipeline blew up, then everybody who’s got dual-fuel capability [or is] powered by something other than gas makes an enormous amount of money. Anyone who’s gas-only and didn’t make provisions to be able to run in that scenario loses a lot of money, especially under the New England [Pay-for-]Performance rules that overcompensate performance.”

Patton said the NOPR’s notion of “‘resilience’ is just reliability” for contingencies whose probabilities are so low that grid operators haven’t planned for it.

“And if it happens, our shortage pricing is going to account for it,” he said. “The overriding objective should be to maintain market signals, and there’s only a few of them: There’s energy, ancillary services and capacity. You don’t need 10 products to do that.”